Games Theory and Multinomial Real Options Model to assess strategies, agreements and penalties
Abstract
When selecting and designing strategies in competitive environments, three potential sources of uncertainty must be taken into account: risks deriving from self-actions, risks emerging from states of nature and risks present in competitors’ decisions. That is why a numerical model that considers one’s competitors’ actions is needed to develop value strategies, joint venture design and penalty analysis. This paper proposes a simple numerical Game Theory and Real Options model with multiple sources of underlying risk. The first part sets forth the mathematical basis of the model, illustrating its function with case valuations related to strategies where there is no collaborative agreement. Cooperation strategies and default monetary penalties are then valued, and finally the main conclusions are drawn.Keywords:
Strategy assessment, Multinomial real options, Game theory, Initiative strategy, Strategic agreement, Penalty assessmentReferences
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