Optimal Corporate Activities under Uncertainty and Competition

An outline of objectives Commercial enterprises are considered moving for maximizing their expected payoff. Traditional Net Present Value (NPV) method is one of the measures of investment decision. But static NPV method has its limits, since there is a lot of uncertainty in business situations so that actual profit includes a lot of risk. Intuitively, one can see that more alternatives that can react to uncertainty give larger value. Real options show the intuition in mathematics objectively. Then, their expected payoff is affected variously by the environment where they are active. They must decide timing of decision that maximizes their expected payoff in considering these effects. This dissertation focuses on “uncertainty of profit” and “competition” in these effects. Corporate activities under uncertainty are analyzed by real options approach, and under competition by game theory. Real options approach is based on financial option theory, so it assumes that there are no interactions between all the agents. In financial market, there are many agents so that individual interactions disappear. However, in actual asset market, there is a lot of strategic interactions. Therefore, it is necessary to consider strategic interactions in real options approach. On the other hand, corporate activities include some stages depending on the life cycle of the project. First, a firm will enter a new market by initial investment on a new project. Second, it will extend the project when demand increases, and reduce when demand decreases. Or, it will stop the project when demand decreases, and restart when demand recovers. Finally, it exits the market when it can not remain in the market. Each stage has different real options and games. Therefore, each stage needs to be analyzed individually. This dissertation is intended to analyze optimal corporate activities in each stage under uncertainty and competition by using game theoretic real options approach. This dissertation deals with duopoly to simplify its competition.