Competitive Real Options under Private Information

We study a research and development race by extending the standard investmentunder uncertainty framework. Firms observe the stochastic evolution of their own potential payoffs from entry into a market, while conjecturing... [ view full abstract ]

We study a research and development race by extending the standard investment
under uncertainty framework. Firms observe the stochastic evolution of their own potential payoffs from entry into a market, while conjecturing about the unobserved state of their opponents. They face a trade-off between immediate entry or delay, under the threat of preemption by a rival. We analytically characterize both stationary Markov perfect equilibria and the transitions using a coupled system of differential equations. For standard initial conditions, the transitions display long-lived dynamics and an intensity of competition that first builds and then subsides slowly towards a steady state. We also discuss comparative statics regarding development speed, uncertainty, and asymmetries
between players.