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 ?xed costs of investment and time-to-build, the ?rm 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 ?nd that positive capital depreciation, technology improvement, and harm e¤ects to the low-technology producer are not su¢ cient to generate equilibria characterized by action.