On the welfare and policy implications of a two-period real option game

We consider investment decisions in a discrete time, two-stage real option game where firms move sequentially, in the context of a Public-Private Partnership (PPP) problem. The value of the option depends on the market structure which we assume to be either a monopoly or a Bertrand differentiated duopoly. We show that, in an equilibrium where no firm invests in the first period, a government intervention, in form of a subsidy, can improve the welfare level.