The doctoral dissertations of the former Helsinki University of Technology (TKK) and Aalto University Schools of Technology (CHEM, ELEC, ENG, SCI) published in electronic format are available in the electronic publications archive of Aalto University - Aaltodoc.

On Investment, Uncertainty, and Strategic Interaction with Applications in Energy Markets

Pauli Murto

Dissertation for the degree of Doctor of Technology to be presented with due permission for public examination and debate in Auditorium K at Helsinki University of Technology, Espoo, Finland, on the 7th of May, 2003, at 12 o'clock noon.

Overview in PDF format (ISBN 951-22-6445-5)   [302 KB]
Dissertation is also available in print (ISBN 951-22-6444-7)


The thesis presents dynamic models on investment under uncertainty with the focus on strategic interaction and energy market applications. The uncertainty is modelled using stochastic processes as state variables. The specific questions analyzed include the effect of technological and revenue related uncertainties on the optimal timing of investment, the irreversibility in the choice between alternative investment projects with different degrees of uncertainty, and the effect of strategic interaction on the initiating of discrete investment projects, on the abandonment of a project, and on incremental capacity investments. The main methodological feature is the incorporation of game theoretic concepts in the theory of investment. It is argued that such an approach is often desirable in terms of real applications, because many industries are characterized by both uncertainty and strategic interaction between the firms. Besides extending the theory of investment, this line of work may be seen as an extension of the theory of industrial organization towards the direction that views market stability as one of the factors explaining rational behaviour of the firms.

This thesis consists of an overview and of the following 6 publications:

  1. Murto, P., 2003. Timing of investment under technological and revenue related uncertainties. Systems Analysis Laboratory Research Report E11, Helsinki University of Technology. © 2003 by author.
  2. Murto, P. and Nese, G., 2002. Input price risk and optimal timing of energy investment: choice between fossil- and biofuels. Working Paper No. 25 / 02, Institute for Research in Economics and Business Administration. Bergen, May 2002 (revised January 2003). © 2002 by authors.
  3. Murto, P. and Keppo, J., 2002. A game model of irreversible investment under uncertainty. International Game Theory Review, Vol. 4, No. 2, pages 127-140. © 2002 World Scientific Publishing. By permission.
  4. Murto, P., Näsäkkälä, E. and Keppo, J., Timing of investments in oligopoly under uncertainty: a framework for numerical analysis. European Journal of Operational Research, to appear. © 2003 by authors and © 2003 Elsevier Science. By permission.
  5. Murto, P., Exit in duopoly under uncertainty. RAND Journal of Economics, to appear. © 2003 by author.
  6. Pineau, P.-O. and Murto, P., An oligopolistic investment model of the Finnish electricity market. Annals of Operations Research, to appear. © 2003 by authors and © 2003 Kluwer Academic Publishers. By permission.

Keywords: irreversible investment, uncertainty, real options, energy markets, game theory

This publication is copyrighted. You may download, display and print it for Your own personal use. Commercial use is prohibited.

© 2003 Helsinki University of Technology

Last update 2011-05-26