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9. Fear of the Market or Fear of the Competitor? Ambiguity in a Real Options Game

Author

Hellmann, Tobias and Thijssen, Jacco J.J.

Subjects
Markets (Economics) -- Analysis, Decision-making -- Analysis, Demand (Economics) -- Analysis, Business, Mathematics
Abstract

In this paper, we study an investment game between two firms with a first-mover advantage, where payoffs are driven by a geometric Brownian motion. At least one of the firms is assumed to be ambiguous over the drift, with maxmin preferences over a strongly rectangular set of priors. We develop a strategy and equilibrium concept allowing for ambiguity and show that equilibria can be preemptive (a firm invests at a point where investment is Pareto dominated by waiting) or sequential (one firm invests as if it were the exogenously appointed leader). Following the standard literature, the worst-case prior for an ambiguous firm in the follower role is obtained by setting the lowest possible trend in the set of priors. However, if an ambiguous firm is the first mover, then the worst-case drift can fluctuate between the lowest and the highest trends. This novel result shows that 'worst-case prior' in a setting with drift ambiguity does not always equate to 'lowest trend.' As a consequence, preemptive pressure reduces. We show that this results in a possibly increasing level of ambiguity in firm value. If only one firm is ambiguous, then the value of the nonambiguous firm can be increasing in the level of ambiguity of the ambiguous firm. Keywords: real options * Knightian uncertainty * worst-case prior * optimal stopping * timing game, 1. Introduction Many, if not most, investment decisions taken by firms are characterized by substantial upfront sunk costs, (partial) irreversibility, and uncertainty over future cash flows (cf. Dixit and Pindyck [...]

Published
2018
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13. The role of industrial and market symbiosis in stimulating CO₂ emission reductions

Author

Compernolle, Tine and Thijssen, Jacco J.J.

Subjects
Chemistry, Economics, Biology
Abstract

An increasing concern for climate change puts pressure on industrial firms to achieve carbon emission reductions. These could be realized through cooperation among firms in industrial chains, which leads to industrial symbiosis. By taking a real options approach, we make the timing component of the investment decisions explicit. This is important in assessing the impact of carbon-reducing investment over a specific time-span. We show that a joint venture between a CO2 emitting firm and a firm that can use the CO2 will result in a higher probability that an investment in CO2 capture will take place within a specific time period, which reduces the amount of CO2 emitted substantially. We also show that, in addition to industrial symbiosis, cooperation between firms can benefit from "market symbiosis" as well, in the sense that investments are more likely to take place in markets that are positively correlated. This is an important result, given that the EU has set binding targets to its Member States for reducing their emissions.

Published
2022

15. Preemption in a real option game with a first mover advantage and player-specific uncertainty

Author

Thijssen, Jacco J.J.

Subjects
Business, Economics
Abstract

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jet.2010.10.002 Byline: Jacco J.J. Thijssen Keywords: Timing games; Preemption; Rent equalization Abstract: In this paper a two-player real option game with a first-mover advantage is analyzed, where payoffs are driven by a player-specific stochastic state variable. It is shown that there exists an equilibrium which has qualitatively different properties from those in standard real option games driven by common stochastic shocks. The properties of the equilibrium are four-fold: (i) preemption does not necessarily occur, (ii) if preemption takes place, the rent-equalization property holds, (iii) for almost all sample paths it is clear ex-ante which player invests first, and (iv) it is possible that both players invest simultaneously, even if that is not optimal. It is argued from simulations that real option games with a common one-dimensional shock do not provide a good approximation for games with player-specific uncertainty, even if these are highly correlated. Author Affiliation: Department of Economics & Related Studies, University of York, Heslington, York YO10 5DD, UK Article History: Received 10 March 2009; Revised 30 July 2010; Accepted 31 July 2010 Article Note: (footnote) [star] The author thanks Peter Spencer, Magdalena Trojanowska, and seminar participants at Tilburg University, Trinity College Dublin, the University of York and the SaA[macron]d Business School, University of Oxford for their constructive comments. Comments from an anonymous referee and the Editor (Christian Hellwig) are greatly appreciated.

Published
2010

16. The effect of information streams on capital budgeting decisions

Author

Thijssen, Jacco J.J., Huisman, Kuno J.M., and Kort, Peter M.

Subjects
Bayesian statistical decision theory, Investment analysis, Business, Business, general, Business, international
Abstract

The study focuses on a firm that is faced with the decision of investing in a project where, over time, the firm receives imperfect signals indicating the project's profitability. Results demonstrate that the probability of investing in a project with low profitability is larger when the firm uses a conventional rule like the net present value.

Published
2004

18. Fear of the market or fear of the competitor? Ambiguity in a real options game

Author

Hellmann, Tobias and Thijssen, Jacco J.J.

Subjects
Computer Science::Computer Science and Game Theory, Knightian Uncertainty, Timing Game, Optimal Stopping, Worst–Case Prior, Real Options
Abstract

In this paper we study a two–player investment game with a first mover advantage in continuous time with stochastic payoffs, driven by a geometric Brownian motion. One of the players is assumed to be ambiguous with max–min preferences over a strongly rectangular set of priors. We develop a strategy and equilibrium concept allowing for ambiguity and show that equilibria can be preemptive (a player invests at a point where investment is Pareto dominated by waiting) or sequential (one player invests as if she were the exogenously appointed leader). Following the standard literature, the worst–case prior for the ambiguous player if she is the second mover is obtained by setting the lowest possible trend in the set of priors. However, if the ambiguous player is the first mover, then the worst–case prior can be given by either the lowest or the highest trend in the set of priors. This novel result shows that “worst–case prior” in a setting with geometric Brownian motion and –ambiguity over the drift does not always equate to “lowest trend”.

Published
2016

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