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Preemptive investment under uncertainty

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  • Steg, Jan-Henrik

Abstract

This paper provides a general characterization of subgame-perfect equilibria for strategic timing problems, where two firms have the (real) option to make an irreversible investment. Profit streams are uncertain and depend on the market structure. The analysis is based directly on the inherent economic structure of the model. In particular, determining equilibria with preemptive investment is reduced to solving a single class of constrained optimal stopping problems. Further tools are derived for analyzing Markovian state-space models. Applications to typical models from the literature complete commonly insufficient equilibrium arguments, show when uncertainty leads to qualitatively different behavior, and establish additional equilibria that are Pareto improvements.

Suggested Citation

  • Steg, Jan-Henrik, 2018. "Preemptive investment under uncertainty," Games and Economic Behavior, Elsevier, vol. 110(C), pages 90-119.
    • Handle: RePEc:eee:gamebe:v:110:y:2018:i:c:p:90-119
    DOI: 10.1016/j.geb.2018.03.009
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    1. Thijssen, Jacco J.J. & Huisman, Kuno J.M. & Kort, Peter M., 2012. "Symmetric equilibrium strategies in game theoretic real option models," Journal of Mathematical Economics, Elsevier, vol. 48(4), pages 219-225.
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    6. Boyarchenko, Svetlana & Levendorskiĭ, Sergei, 2014. "Preemption games under Lévy uncertainty," Games and Economic Behavior, Elsevier, vol. 88(C), pages 354-380.
    7. Azevedo, Alcino & Paxson, Dean, 2014. "Developing real option game models," European Journal of Operational Research, Elsevier, vol. 237(3), pages 909-920.
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    11. Jan-Henrik Steg & Jacco Thijssen, 2015. "Quick or Persistent? Strategic Investment Demanding Versatility," Papers 1506.04698, arXiv.org.
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    14. Riedel, Frank & Steg, Jan-Henrik, 2017. "Subgame-perfect equilibria in stochastic timing games," Journal of Mathematical Economics, Elsevier, vol. 72(C), pages 36-50.
    15. Drew Fudenberg & Jean Tirole, 1985. "Preemption and Rent Equalization in the Adoption of New Technology," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(3), pages 383-401.
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    Citations

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    Cited by:

    1. Smirnov, Vladimir & Wait, Andrew, 2021. "Preemption with a second-mover advantage," Games and Economic Behavior, Elsevier, vol. 129(C), pages 294-309.
    2. Steg, Jan-Henrik, 2022. "On identifying subgame-perfect equilibrium outcomes for timing games," Games and Economic Behavior, Elsevier, vol. 135(C), pages 74-78.
    3. Herbert Dawid & Serhat Gezer, 2022. "Markov Perfect Equilibria in Multi-Mode Differential Games with Endogenous Timing of Mode Transitions," Dynamic Games and Applications, Springer, vol. 12(2), pages 363-393, June.
    4. Ebina, Takeshi & Kumakura, Yuya & Nishide, Katsumasa, 2022. "Hostile takeovers or friendly mergers? Real options analysis," Journal of Corporate Finance, Elsevier, vol. 77(C).
    5. Steg, Jan-Henrik & Thijssen, Jacco J.J., 2023. "Strategic investment with positive externalities," Games and Economic Behavior, Elsevier, vol. 138(C), pages 1-21.
    6. Riedel, Frank & Steg, Jan-Henrik, 2017. "Subgame-perfect equilibria in stochastic timing games," Journal of Mathematical Economics, Elsevier, vol. 72(C), pages 36-50.

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    More about this item

    Keywords

    Preemption; Real options; Irreversible investment; Subgame-perfect equilibrium; Optimal stopping;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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