An investment decision making analysis in a monopolistically competitive real estate market based on real option and game theory

The real estate market is always full of all kinds of risks, among which the uncertainty of demand in future has been considered as a key factor in the process of investment decision-making. Traditional project evaluation methods based on discounted cash flow analysis (DCF) ignore the upside potentials to an investment from managerial flexibility and innovation and the value brought from the uncertain project factors in a changing and turbulent market. A real option approach that borrows ideas from the financial option offers a fresh perspective for real estate investment projects due to two important characteristics within these projects, irreversibility and deferability. However, at the same time, it is also based on the assumption of perfect monopoly, which can be met only in the perfectly monopolistic market. In the perfectly competitive market, it will be unnecessary to exercise game theory analysis due to the sufficiency of competition. Thus, on the basis of a brief introduction of real option, especially its characteristics, this paper constructs a game of incomplete information, elucidates in detail how an enterprise can reach a proper balance between the first-moving advantage (FMA) and the real option (RO) in a monopolistically competitive real estate market made up by two enterprises by means of classification and discussion and finally makes the right decision. Finally, this paper reclassifies the markets into three different kinds according to the different results/equilibria of the game in markets of different levels of risks and tentatively points out the decision-making methods in the circumstance of incomplete market information.