Preemption Games: Theory and Experiment
AbstractSeveral impatient investors with private costs C i face an indivisible irreversible investment opportunity whose value V is governed by geometric Brownian motion. The first investor i to seize the opportunity receives the entire payoff, V-C i. We characterize the symmetric Bayesian Nash equilibrium for this game. A laboratory experiment confirms the model's main qualitative predictions: competition drastically lowers the value at which investment occurs; usually the lowest-cost investor preempts the other investors; observed investment patterns in competition (unlike monopoly) are quite insensitive to changes in the Brownian parameters. Support is more qualified for the prediction that markups decline with cost. (JEL C73, D44, D82, G31)
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 100 (2010)
Issue (Month): 4 (September)
Other versions of this item:
- Anderson, Steven T & Friedman, Daniel & Oprea, Ryan, 2008. "Preemption Games: Theory and Experiment," Santa Cruz Department of Economics, Working Paper Series qt0pr4g8h1, Department of Economics, UC Santa Cruz.
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
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