A Study of Inaction in Investment Games Via the Early Exercise Premium Representation

This paper examines strategic investment in the context of a duopolistic continuous-time real options game. Our contribution is twofold, economic and methodological. The former is the recognition that, under fixed costs of investment and time-to-build, the firm pays a fraction of the implicit strike price to its competitor in the form of transferred foregone consumer demand. The latter is the introduction of the early exercise premium representation as a valuable device for the characterization of optimal exercise policies in real options games. We find that positive capital depreciation, technology improvement, and harm effects to the low-technology producer are not sufficient to generate equilibria characterized by action