Simulation Approach for a Two-Player Real Options Signaling Game

Abstract

Situations where hidden information exists among involved parties can be found in a variety of diverse domains, ranging, for example, from market entry to military operations. Game theory provides valuable tools to model and analyze such complex settings, with signaling games being one of the approaches. Entering an existing market poses several challenges for a new player and can be studied from a variety of viewpoints. One way to approach it, is by a real options signaling game, where in the simplest form an entrant and an incumbent firm are participating and hidden information exists. In this paper we focus on the market entry scenario and approach it by means of a real options signaling game. The work builds on previous work and contributes to the limited literature on the domain. We introduce the basic notations and background and describe the game setting. Next, we present a simulation approach demonstrating the basic steps, according to the theory, and present the results of simulation executions. The work aims to build a generic model for such market games on top of a two player setting, but the concept is not limited to market entry only, but further expanded in relevant domains where hidden information exists.