A Two-Stage Investment Game in Real Option Analysis on IS/IT Projects

With the rapid development of information and communication technology, the decision makers of firms are facing many kinds of IS/IT projects investment opportunities, so they need to provide their preferences over a set of decision alternatives in order to maximize investment value of the projects. Considering the special characteristics of IS/IT projects, this paper develops a two-stage investment game model between two competitive firms on IS/IT projects. This model integrates the ideas of real option theory, game theory, NPV and dynamic programming method. At first, the investment thresholds are derived to divide the areas of market demand. Then the fully characterized equilibrium strategies for both firms are proposed based on these areas. The research in this paper provides a new analytical framework on the investment decision-making for IS/IT projects.