Title: Real options games between two competitors: the case of price war

Authors: Elżbieta Rychłowska-Musiał

Addresses: Department of Applied Mathematics, Poznań University of Economics and Business, Al. Niepodległości 10, 61 875 Poznań, Poland

Abstract: This paper takes the subject of optimal investment strategies for firms acting on a competitive market. An investment decision-making process is described as a game between two players, and the real options approach is used to find a value of an investment project, therefore the paper falls in the area of the real options games. Based on games solutions we formulate recommendations for competitors. It comes as no surprise that the advantage is primarily on the side of a dominant company, but under certain circumstances, a weaker party has a very strong bargaining chip. To mitigate possible effects of price war, firms may cooperate and their negotiations could be supported by a payoff transfer computed as the coco value. It also turned out that the possible cooperation between competitors gains significance when a project risk is high, as well as when the price war is cut-throat.

Keywords: real options; investment option; real options games; competition; price wars; bargaining game; cooperative-competitive value; coco value.

DOI: 10.1504/IJCEE.2020.104177

International Journal of Computational Economics and Econometrics, 2020 Vol.10 No.1, pp.92 - 110

Received: 03 Apr 2018
Accepted: 13 Jun 2019
Published online: 20 Dec 2019 *

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