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Investment Under Uncertainty with Stochastically Switching Profit Streams: Entry and Exit over the Business Cycle

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  • Driffill John

    (University of London)

  • Raybaudi Marzia

    (University of Birmingham)

  • Sola Martin

    ()
    (University of London and Universidad Torcuato Di Tella)

Abstract

We study how entry and exit decisions of a monopolist are affected by business cycle conditions. We model the business cycle as a two-state Markov process, and assume that the demand curve faced by the monopolist evolves differently in the two states of the economy. We explore conditions under which the monopolist would enter or exit, either in a boom or a recession.

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Bibliographic Info

Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 7 (2003)
Issue (Month): 1 (April)
Pages: 1-40

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Handle: RePEc:bpj:sndecm:v:7:y:2003:i:1:n:1

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Cited by:
  1. Chen, Yu-Fu & Funke, Michael, 2009. "Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty," SIRE Discussion Papers 2009-31, Scottish Institute for Research in Economics (SIRE).
  2. Pierpaolo Benigno & Luca Antonio Ricci, 2011. "The Inflation-Output Trade-Off with Downward Wage Rigidities," American Economic Review, American Economic Association, vol. 101(4), pages 1436-66, June.
  3. Sodal, Sigbjorn, 2006. "Entry and exit decisions based on a discount factor approach," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 1963-1986, November.
  4. Yu-Fu Chen & Michael Funke, 2004. "Cyclical Uncertainty and Physical Investment Decisions," Dundee Discussion Papers in Economics 169, Economic Studies, University of Dundee.
  5. Makoto Goto & Katsumasa Nishide & Ryuta Takashima, 2013. "Irreversible Investment under Competition with a Markov Switching Regime," KIER Working Papers 861, Kyoto University, Institute of Economic Research.
  6. Francisco Ruiz-Aliseda & Jianjun Wu, 2007. "Irreversible investment in stochastically cyclical markets," Economics Working Papers 1018, Department of Economics and Business, Universitat Pompeu Fabra.
  7. John Driffill & Turalay Kenc & Martin Sola, 2013. "Real Options With Priced Regime-Switching Risk," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 16(05), pages 1350028-1-1.

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