Singular Control Games: Strategic Issues in Real Options and Dynamic Oligopoly under Knightian Uncertainty

• Applicant: Professor Dr. Frank Riedel
• Subject Area: Economic Theory ; Mathematics
• Term: from 2011 to 2018
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 199871851

Decisions of firms often have to be made under uncertainty and in competitive environments, with long-ranging consequences, for example if they are hardly reversible due to physical or legal frictions. Especially long-term investments in innovative markets frequently face Knightian uncertainty as exact probability assessments of future demand or profitability are difficult to make or even impossible. The firms or players thus encounter strategic aspects as well as ambiguity or model uncertainty. In the first part of this project we made good progress in the analysis of single agent real option decision in continuous time and under Knightian uncertainty; we applied these results to the analysis of so--called open loop equilibria in dynamic oligopoly and public good games. The analysis of feedback (or sub game perfect) meets fundamental conceptual problems in continuous time; the special structure of stopping games, however, allows such an analysis, and we have developed a framework for such stopping games in the first part. In the planned continuation, we aim to apply these insights to repeated investment decisions in strategic environments under Knightian uncertainty. Applications include the feedback analysis of Cournot and Bertrand markets as well as applications to real option games and some financial game options.

• DFG Programme: Research Grants
• Co-Investigator: Professor Dr. Jan-Henrik Steg