Optimal Timing of Real Estate Investment under an Asymmetric Duopoly

Article

Abstract

This paper examines the sub-game equilibrium strategies for a duopoly real option model consisting of two firms with asymmetric demand functions. The relative strength of the firms is found to have significant impact on the firms’ equilibrium strategies. Preemptive strategies are critical if difference in strength between the two competing firms is relatively small. Short bursts and recession induced overbuilding are two outcomes in the asymmetric duopoly model. The model, however, predicts that the two phenomena occur in earlier phases of market cycles, rather than in the state of depression. In a depressed market with high volatility, the leader and the follower will both choose the waiting strategies. Construction cascade is, therefore, not an expected phenomenon in a depressed market in the asymmetric duopoly framework.

Keywords

Duopoly game Real options Preemptive strategies Asymmetric demands 

JEL Classifications

G12 G13 

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Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Department of Real Estate & Urban Land Economics, School of BusinessUniversity of WisconsinMadisonUSA
  2. 2.Department of Real EstateNational University of SingaporeSingaporeSingapore

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