Department of Applied Mathematics & Physics, Kyoto University

Technical Report 2006-002 (February 02, 2006)

Evaluation of Firm's Loss Due to Incomplete Information in Real Investment Decision

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We investigate the effect of incomplete information in a model where a start-up with a unique idea and technology pioneers a new market but will eventually be expelled from the market by a large firm's subsequent entry. We evaluate the start-up's loss due to incomplete information about the large firm's behavior. We clarify conditions under which the start-up needs more information about the large firm. The proposed method of evaluating the loss due to incomplete information could also be applied to other real options models involving several firms.