Standard real options theory states that there is a value of waiting and that irreversible investment should be postponed when revenue is uncertain. Past literature has shown that competition under complete information generates a preemption effect that reduces this value of waiting without completely eliminating it. This paper studies what happens to the value of waiting when a firm has incomplete information about its competitor in an oligopoly framework. We find that the value of waiting depends on the quality of the information, the size of the first-mover advantage and the number of competitors. We show that a unique and symmetric equilibrium exists under common and consistent priors. Investment is accelerated when one firm acquires complete information about the profitability of the other firm, while the other firm's information remains incomplete. We calculate the value of (acquiring) information under different assumptions on the priors.
Published May 2012 , 30 pages