Real options bargaining games

Elżbieta Rychłowska-Musiał; Elżbieta Rychłowska-Musiał

doi:10.3934/QFE.2019.4.624

Quantitative Finance and Economics

2019, Volume 3, Issue 4: 624-644. doi: 10.3934/QFE.2019.4.624

Previous Article Next Article

Research article Special Issues

Real options bargaining games

Elżbieta Rychłowska-Musiał ^,

Department of Applied Mathematics, Poznań University of Economics and Business, Poznań, Poland

Received: 31 May 2019 Accepted: 27 September 2019 Published: 11 October 2019
JEL Codes: G13, D81, C78

The real options approach has been supporting investment decision-making processes for years. However, on competitive markets, the real options games approach is the more suitable way. In this article, a real options game subject to analysis is the situation in which two companies with different market share are exploring an opportunity to implement a new investment project. It is known that competition on the market reduces the scope of benefits a company can gain whilst implementing the project. In this paper, we show that this reduction can be mitigated by taking into account payoff transfer designated as a bargaining solution. We discuss three main types of games between companies that we can observe on the market; then we analyze their bargaining solutions, and finally-come up with recommendations to companies. A firm that dominates its respective market usually benefits by implementing the most advantageous strategy, but in certain situations it should pay special attention to its weaker competitor's opportunities and try to anticipate its movements. In the paper, we show that with high project risk and significant asymmetry in the firms' market share, a weaker company may still hold all the cards.
- investment option,
- real options games,
- bargaining game,
- non-symmetric Nash bargaining solution,
- cooperative-competitive value,
- coco value
Citation: Elżbieta Rychłowska-Musiał. Real options bargaining games[J]. Quantitative Finance and Economics, 2019, 3(4): 624-644. doi: 10.3934/QFE.2019.4.624

Related Papers:

Abstract

The real options approach has been supporting investment decision-making processes for years. However, on competitive markets, the real options games approach is the more suitable way. In this article, a real options game subject to analysis is the situation in which two companies with different market share are exploring an opportunity to implement a new investment project. It is known that competition on the market reduces the scope of benefits a company can gain whilst implementing the project. In this paper, we show that this reduction can be mitigated by taking into account payoff transfer designated as a bargaining solution. We discuss three main types of games between companies that we can observe on the market; then we analyze their bargaining solutions, and finally-come up with recommendations to companies. A firm that dominates its respective market usually benefits by implementing the most advantageous strategy, but in certain situations it should pay special attention to its weaker competitor's opportunities and try to anticipate its movements. In the paper, we show that with high project risk and significant asymmetry in the firms' market share, a weaker company may still hold all the cards.

References

[1]	Arasteh A (2017) Considering the investment decisions with real options games approach. Renew Sust Energ Rev 72: 1282-1294.
[2]	Azevedo A, Paxson DA (2014) Developing real option game models. EUR J Oper Res 237: 909-920.
[3]	Azevedo A, Paxson DA (2018) Rivalry and uncertainty in complementary investments with dynamic market sharing. Ann Oper Res 271: 319-355. doi: 10.1007/s10479-017-2752-4
[4]	Chevalier-Roignant B, Trigeorgis L (2011) Competitive Strategy: Options and Games, The MIT Press.
[5]	Dixit AK, Pindyck RS (1994) Investment Under Uncertainty, Princeton University Press: Princeton, New Jersey.
[6]	Grenadier SR (2000) Game Choices: The Intersection of Real Options and Game Theory, Grenadier(eds.) London: Risk Books.
[7]	Hellmann T, Thijssen JJJ (2018) Fear of the Market or Fear of the Competitor? Ambiguity in a Real Options Game. Oper Res 66: 1744-1759.
[8]	Huisman KJM, Kort PM (2015) Strategic capacity investment under uncertainty. RAND J Econ 46:376-408.
[9]	Kalai A, Kalai E (2013) Cooperation in strategic games revisited. Q J Econ 128: 917-966.
[10]	Leung CM, Kwok YK (2016) Real options game models of R&D competition between asymmetric firms with spillovers. Decisions Econ Financ 39: 259-291.
[11]	Nash JF (1950) The Bargaining Problem: Econometrica. 18: 155-162.
[12]	Rychłowska-Musiał E (2017) Value Creation in a Firm Through Coopetition. Real Options Games Approach, Contemporary Trends and Changes in Finance, Springer, 285-295.
[13]	Rychłowska-Musiał E (2018) Real Options Games Between Asymmetric Firms on a Competitive Market, Advances in Panel Data Analysis in Applied Economic Research, Springer, 299-310.
[14]	Smit HTJ, Ankum LA (1993) A Real Options and Game-Theoretic Approach to Corporate Investment Strategy under Competition. Financ Manage 22: 241-250.
[15]	Smit HTJ, Trigeorgis L (2004) Strategic Investment. Real Options and Games, Princeton and Oxford:Princeton University Press.
[16]	Trigeorgis L, Baldi F (2017) Dynamic Hybrid Patent Strategies: Fight or Cooperate?, 21 Real Options Annual Conference, Boston.
[17]	Trigeorgis L, Baldi F, Baglieri D, et al. (2019) Payment Structure, Bargaining Power and Real Options: Evidence from Biotechnology Licensing, Academy of Management Proceedings.
[18]	Watson J (2013) An Introduction to Game Theory, Norton W.W. & Company Inc., New York.

Reader Comments

Your name:*

Email:*
© 2019 the Author(s), licensee AIMS Press. This is an open access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0)