THIRD GENERATION MOBILE GAMES – An application of real competition options

The third generation technology will confer to mobile phones all the capacity and speed of a fixed line phone with the additional flexibility of mobility. Major investments in 3G installation facilities are planned in developed economies; the reported investment plans indicate “leader-follower” patterns. Using three real competition options models, we determine the optimal timing of 3G investment of one Portuguese mobile company, Optimus, taken as the follower. In the first of those models both the number of units sold and the cash flow per-unit of the players follow separate but possibly correlated geometric Brownian motion. In the second model the investment cost and the operating cash flow are the state variables. The third model assumes that the investment cost and the operating cash flow stream of the total market follow separate geometric Brownian motion and that the market share of the follower occurs according to a Poisson process. Consistent parameters are used to derive the leader and follower value functions for different models, which are compared to a traditional NPV valuation analysis. A positive NPV points to the acceptance of the investment and the immediate entry of all of the players in the market. The results of all the models point to the delay of the entry of the follower, which might account for the observed behaviour of the actual players.