Non-Exclusive Real Options and the Principle of Rent-Equalisation

This paper considers the problem of the exercise decision of non-exclusive perpetual American-style real options in a two-player setting. Much of this literature has applied ideas from deterministic timing games directly to Real Options Theory, leading to unsatisfactory mathematical foundations. This paper presents a general model of non-exclusive real options. Existence of equilibrium is proved for the class of games with a first-mover advantage and where uncertainty is governed by a (possibly multi-dimensional) Markov process. The method is then applied to explicitly study equilibria in a two-player game where uncertainty is governed by a two-dimensional, correlated, geometric Brownian motion.