Journal
JOURNAL OF THE OPERATIONAL RESEARCH SOCIETY
Volume 74, Issue 4, Pages 1166-1182Publisher
TAYLOR & FRANCIS LTD
DOI: 10.1080/01605682.2022.2070036
Keywords
Real options games; risk aversion; capacity investments; preemptive games
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This study examines the joint effect of uncertainty, competition, and risk-aversion on the optimal time and size of firms in a duopoly. It finds that increasing risk-aversion affects the leader's choice between deterring and accommodating the follower's entry, resulting in reduced equilibrium investment sizes and timing.
We study the joint effect of uncertainty, competition, and risk-aversion on the optimal time and size of firms in a duopoly. As risk-aversion increases, the leader's alternatives between deterring and accommodating the follower's entry become equivalent. When the leader's role is assigned exogenously, risk-aversion reduces equilibrium investment sizes and timing. In equilibrium, the leader is always the largest firm in the market. When the leader's role is determined in equilibrium, risk-aversion delays the rent equalization point. At high levels of risk-aversion, both firms invest in the same capacity.
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