Strategic Entry and Market Leadership in a Two-Player Real Options Game

33 Pages Posted: 16 Mar 2002 Last revised: 22 Jan 2013

See all articles by Mark B. Shackleton

Mark B. Shackleton

Lancaster University - Department of Accounting and Finance

Andrianos E. Tsekrekos

Athens University of Economics and Business - Department of Accounting and Finance

Rafal M. Wojakowski

University of Surrey; Lancaster University - Management School

Abstract

We analyse the entry decisions of competing firms in a two-player stochastic real option game, when rivals can exert different but correlated uncertain profitabilities from operating. In the presence of entry costs, decision thresholds exhibit hysteresis, the range of which is decreasing in the correlation between competing firms. The expected time of each firm being active in the market and the probability of both rivals entering in finite time are explicitly calculated. The former (latter) is found to decrease (increase) with the volatility of relative firm profitabilities implying that market leadership is shorter-lived the more uncertain the industry environment. In an application of the model to the aircraft industry, we find that Boeing's optimal response to Airbus' launch of the A3XX super carrier is to accommodate entry and supplement its current product line, as opposed to the riskier alternative of committing to the development of a corresponding super jumbo.

Keywords: Real options, Intertemporal optimal exchange, Two-player stochastic game, Expected active times and probabilities

JEL Classification: D81, L13, G13, G31

Suggested Citation

Shackleton, Mark B. and Tsekrekos, Andrianos E. and Wojakowski, Rafal M., Strategic Entry and Market Leadership in a Two-Player Real Options Game. Journal of Banking and Finance, Vol. 28, No. 1, 2004, Available at SSRN: https://ssrn.com/abstract=302369 or http://dx.doi.org/10.2139/ssrn.302369

Mark B. Shackleton

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
44 1524 594131 (Phone)
44 1524 847321 (Fax)

Andrianos E. Tsekrekos (Contact Author)

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Rafal M. Wojakowski

University of Surrey ( email )

Faculty of Business, Economics and Law
The Surrey Business School
Guildford, Surrey GU2 7XH
United Kingdom
+44 1483 683477 (Phone)

HOME PAGE: http://www.surrey.ac.uk/sbs/people/rafal_wojakowski/index.htm

Lancaster University - Management School ( email )

Lancaster, LA1 4YX
United Kingdom
+44 (1524) 593630 (Phone)
(01524) 847321 (Fax)

HOME PAGE: http://www.lums.lancs.ac.uk/profiles/rafal-wojakowski/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
711
Abstract Views
3,735
rank
43,211
PlumX Metrics