Real options and strategic interactions in imperfectly competitive markets

  • Dare Samuel Owatemi

Student thesis: Doctoral Thesis

Abstract

As Smit and Trigeorgis (2004), Smit and Ankum (1993), and others have observed, an options-based approach to strategic investment needs to be considered from the perspective of competitive market structures. The models in this thesis show the synergies obtainable when real options ideas are embedded in industrial organisation-type frameworks. The results are insights that neither field, thus far, has captured independently.Firstly, we present a real options model in an investment game of incomplete information in a duopoly where product market competition influences the value of the investment and entry times are endogenously determined. We show that type-asymmetry or the level of initial demand, independently, or together, as in extant models, are insufficient criteria upon which endogenous roles under uncertainty may be determined when firms have private information over their types. Rather, ex post market structures are determined by threshold functions whose images lie in the type-space of the firms. These results are discussed in detail along with numerical examples.Secondly, whilst the advertising literature has particular focus on either the informative or persuasive effects of advertising efforts and views advertising investments as intertemporal expenditures, this thesis addresses the brand loyalty aspects of advertising in a new market which, asides from routine expenditure, requires a lumpy initial investment outlay in the development of a viable competitive advertising campaign. We view this as a real options investment with a differential game played at the advertising-efforts level.Lastly, empirical analyses on the impact of celebrity endorsements have largely been inconclusive. In this thesis, we model investments in brand equity using celebrity endorsers with embedded options over the investment opportunity. The aim is to determine optimal strategies when the arrival of the investment itself follows a random process and when firms can update their beliefs about the risk profile of the celebrity.
Date of Award1 Dec 2013
LanguageEnglish
Awarding Institution
  • University Of Strathclyde
SponsorsUniversity of Strathclyde
SupervisorAlexander Dickson (Supervisor) & Gary Koop (Supervisor)

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