This chapter covers the basic mathematics needed to value the investment opportunities of firms that operate in an oligopolistic market. It combines the tools of (financial) option pricing and industrial organization. At a mathematical level the model presented here is a combination of optimal stopping theory and game theory. Most of the game theoretic real options literature is based on the notion of equilibrium introduced by Fudenberg and Tirole (1984, Review of Economic Studies). This chapter, however, builds on recent work by Thijssen (, mimeo), which exploits the strong Markovian nature of diffusions. The theory is applied to a simple duopoly where it is shown, numerically, that competition in a dynamic setting may be bad for welfare.
IOS Press, Inc.
6751 Tepper Drive
Clifton, VA 20124
Tel.: +1 703 830 6300
Fax: +1 703 830 2300 firstname.lastname@example.org
(Corporate matters and books only) IOS Press c/o Accucoms US, Inc.
For North America Sales and Customer Service
West Point Commons
Lansdale PA 19446
Tel.: +1 866 855 8967
Fax: +1 215 660 5042 email@example.com