Real option duopolies with quasi-hyperbolic discounting

Luo, Pengfei; Tian, Ye; Yang, Zhaojun

doi:10.1016/j.jedc.2019.103829

Cited by 7 publications

(11 citation statements)

References 20 publications

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“…The results are similar to the standard result that an advantageous firm invests earlier and earns more than does a disadvantageous firm (e.g., chapter 8 of Huisman, 2001 and Pawlina and Kort, 2006). The results are also similar to those of Luo et al (2020), who examine the real options duopoly game between time‐consistent and time‐inconsistent firms with symmetric cost structure. Indeed, they show that that the time‐consistent firm enters the market earlier and earns more than its time‐inconsistent competitor does.…”

Section: Model Analysissupporting

confidence: 87%

“…In their model, due to the symmetric cost structure and inefficiency arising from time inconsistency, the time‐consistent firm always becomes the leader and earns the higher value. Unlike Luo et al (2020), in this paper, I show that with certain market characteristics, firm P becomes the second mover but earns the higher value.…”

Section: Introductioncontrasting

confidence: 54%

“…Given these observations about discount rates, in this paper, I consider that the two firms have different discount rates ρ P and ρ I and optimize the investment decisions using the dynamic programming method (see chapters 4.1 of Dixit and Pindyck, 1994) rather than the risk‐neutral valuation method. The real options literature on time‐inconsistent preferences (e.g., Grenadier and Wang, 2007 and Luo et al., 2020) and group diversity in time preferences (e.g., Ebert et al., 2018 and Luo and Yang, 2020) also use the dynamic programming method under a subjective discount rate.…”

Section: Modelmentioning

confidence: 99%

“…These results contrast with the standard result that regardless of market characteristics, an advantageous firm becomes the leader and earns more than does a disadvantageous opponent (e.g., chapter 8 of Huisman, 2001 and Pawlina and Kort, 2006). Although Luo et al (2020) investigate a real options duopoly of time‐consistent and time‐inconsistent firms, their results are straightforward. In their model, due to the symmetric cost structure and inefficiency arising from time inconsistency, the time‐consistent firm always becomes the leader and earns the higher value.…”

Section: Introductionmentioning

confidence: 99%

“…In the real options context, several papers examine the investment timing decision under uncertainty of discount rates. For instance, Ebert, Wei, and Zhou (2018) and Luo and Yang (2020) investigate the investment timing of a group whose members differ in their discount rates, whereas Grenadier and Wang (2007) and Luo, Tian, and Yang (2020) examine investment timing under a discount rate that changes over time.…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

Preemptive competition between two firms with different discount rates

Nishihara

2020

Manage Decis Econ

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I study a real options duopoly game between two firms with different discount rates. I derive the order of investments, investment thresholds, and firm values in equilibrium. With no cost disadvantage, the patient firm enters the market earlier and earns more than the impatient opponent. When the patient firm has a cost disadvantage, the order of market entry depends on the market characteristics. With a weaker first‐mover advantage, higher volatility, and lower growth rate, the impatient firm is more likely to be the first mover; however, the patient firm can earn more, even though it enters the market later.

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Section: Model Analysissupporting

confidence: 87%

Section: Introductioncontrasting

confidence: 54%

Section: Modelmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Preemptive competition between two firms with different discount rates

Nishihara

2020

Manage Decis Econ

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Optimal investment timing and size decision‐making with jump risk and time‐inconsistent preferences

Wang,

2024

Manage Decis Econ

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This paper analyzes a firm's investment timing and capacity decision by considering the manager's time‐inconsistent preferences and continuous economic depreciation of the capital stock cannot be completely offset. The demand shock of the underlying product evolves according to a double exponential jump‐diffusion process. Within a real options framework, we derive the explicit expressions for the optimal investment threshold and investment size when the manager is sophisticated. We find that time‐inconsistent preferences will lead the firm to delay investment when capital depreciation rate is low and accelerate investment when the rate of capital depreciation is high. Further, we show that capital depreciation rate has a monotonic positive effect on the investment size of a time‐consistent manager but a non‐monotonic effect on that of a sophisticated manager. A sophisticated manager tends to choose a smaller investment size than a time‐consistent manager. Finally, we demonstrate that compared with the geometric Brownian motion, the firm invests later with a larger capacity under the jump‐diffusion model.

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Investment timing and capacity choice in duopolistic competition under a jump-diffusion model

2021

Math Finan Econ

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Real option duopolies with quasi-hyperbolic discounting

Cited by 7 publications

References 20 publications

Preemptive competition between two firms with different discount rates

Preemptive competition between two firms with different discount rates

Optimal investment timing and size decision‐making with jump risk and time‐inconsistent preferences

Investment timing and capacity choice in duopolistic competition under a jump-diffusion model

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