BFS 2002

Poster Presentation

Real Option Games with Incomplete Information and Spillovers

Spiros Martzoukos, Eleftherios Zacharias

We model in a game theoretic context managerial intervention directed towards value enhancement in the presence of uncertainty and spillover effects. Two firms face real investment opportunities, and before making the irreversible decisions, they have options to enhance value by doing more R&D and/or acquiring more information. Due to spillovers, firms act strategically by optimizing their behavior, conditional on the actions of their counterpart. They face two decisions that are solved for interdependently in a two-stage game. The first decision is: what is the optimal level of coordination between them? The second-stage decision is: what is the optimal effort for a given level of the spillover effects and the cost of information acquisition? For the solution we adopt an option pricing framework that allows analytic tractability.