Analysis On Business Investment Under Competition Based On Real Option Games

The traditional investment decision methods, represented by Net Present Value method, compare the present values' of expected income and cost stream to decide. Although they consider the reward of time and risk, they ignore the strategic value of creating following growth opportunities and the flexibility to adjust according to the market changes. Real Options Theory regards all kinds of investment opportunities and management flexibility as option and provides a practical qualitative tool. It is a great progress of investment decision theories. Option and Game Theory is the latest development, which combines option pricing theory and game theory to invest scientifically.First I quoted the latest study and future development about the Real Options Theory, then analyzed the limitation of the traditional NPV method, and drew the conclusion of the rationality of ROV, by comparing the methods of NPV and ROV. Then I introduced some theories about real options, and divided real options into single option and compound option, then classed real options with specialization and share one, from tactic angle. According to the character of the industries, the reaction of the competitors and the specialization or the share of the investment options, this paper also analyzed some game problems about whether a business'should adopt the leading tactic or the waiting one, when should a cooperation tactic or an against one, In the analysis about the investment, I combined the real option method with the game theory.Finally I developed a model of duopoly under uncertainty, considering the competition between the firms explicitly, using ROA, I calculated the two firm's values respectively when they take different roles-to be leader or follower, and then checked the possible equilibriums.