Real estate market equilibrium strategies reveal potential for overbuilding phenomena
The article analyzes how two real estate developers make strategic decisions in an uncertain market. They consider factors like irreversible building costs, fluctuating rent levels, and interconnected demand functions. By using option pricing theory, the researchers study different scenarios: when firms act independently or cooperatively. They find that if one firm has a big advantage, the threat from the other is small. This can lead to short bursts of development and potential overbuilding in certain situations.