An asymmetric option game in a duopolistic real estate market

Makoto Goto, Tomoaki Tabata, Takahiro Ohno

    Research output: Contribution to journalArticle

    Abstract

    This article deals with investment decision-making under uncertainty and competition. The traditional net present value (NPV) method doesn't consider the flexibility of decision-making, so project values tend to be underestimated. A. real options approach that can make up for the weak point of NPV has recently been the focus, but it considers only one agent, similar to the money market. However, in actual case, a competitor's decision-making is sure to influence the project value of the agent. Therefore, the influence of a competitor's decision-making must be estimated. Game theory is effective to optimize one's own actions subject to a competitor's decision-making (strategy). Therefore, the reduction in project value due to competition is formulated by applying game theory to a real options approach. The model should be solved so that the conditional expected value is maximized. We considered a duopolistic real estate market by referring Grenadier [1] in previous studies. While the previous study formulated two symmetric agents, we try to extend the model to two asymmetric agents. Asymmetry results in an asymmetric equilibrium exercise strategy. With this result, we are able to explain the economic phenomenon that previous studies couldn't explain. That is, a firm with superior development technology has an advantage over the firm with inferior technology. Furthermore, we indicate the change in decision-making caused by uncertainty and construction costs from comparative statistics.

    Original languageEnglish
    Pages (from-to)1-11
    Number of pages11
    JournalJournal of Japan Industrial Management Association
    Volume56
    Issue number1
    Publication statusPublished - 2005

    Fingerprint

    Decision making
    Decision Making
    Game
    Real Options
    Net Present Value
    Game theory
    Game Theory
    Uncertainty
    Expected Value
    Exercise
    Asymmetry
    Market
    Real estate market
    Flexibility
    Optimise
    Statistics
    Economics
    Tend
    Costs
    Competitors

    Keywords

    • Competition
    • Game theory
    • Investment decision
    • Real options
    • Uncertainty

    ASJC Scopus subject areas

    • Strategy and Management
    • Management Science and Operations Research
    • Industrial and Manufacturing Engineering
    • Applied Mathematics

    Cite this

    An asymmetric option game in a duopolistic real estate market. / Goto, Makoto; Tabata, Tomoaki; Ohno, Takahiro.

    In: Journal of Japan Industrial Management Association, Vol. 56, No. 1, 2005, p. 1-11.

    Research output: Contribution to journalArticle

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