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Irreversible investment in oligopoly

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  • Jan-Henrik Steg

    ()
    (Institute of Mathematical Economics, Bielefeld University)

Abstract

We offer a new perspective on games of irreversible investment under uncertainty in continuous time. The basis is a particular approach to solve the involved stochastic optimal control problems which allows to establish existence and uniqueness of an oligopolistic open loop equilibrium in a very general framework without reliance on any Markovian property. It simultaneously induces quite natural economic interpretation and predictions by its characterization of optimal strategies through first order conditions. The construction of equilibrium policies is then enabled by a stochastic representation theorem. A stepwise specification of the general model leads to further economic conclusions. We obtain explicit solutions for Lévy processes.

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File URL: http://www.imw.uni-bielefeld.de/papers/files/imw-wp-415.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by Bielefeld University, Center for Mathematical Economics in its series Working Papers with number 415.

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Length: 22 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:bie:wpaper:415

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Web page: http://www.imw.uni-bielefeld.de/
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Keywords: irreversible investment; stochastic game; oligopoly; real options; equilibrium;

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  1. Bertola, Giuseppe, 1998. "Irreversible investment," Research in Economics, Elsevier, vol. 52(1), pages 3-37, March.
  2. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-85, December.
  3. Kerry Back & Dirk Paulsen, 2009. "Open-Loop Equilibria and Perfect Competition in Option Exercise Games," Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4531-4552, November.
  4. Steven R. Grenadier, 2002. "Option Exercise Games: An Application to the Equilibrium Investment Strategies of Firms," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 691-721.
  5. A. Michael Spence, 1979. "Investment Strategy and Growth in a New Market," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 1-19, Spring.
  6. Frank Riedel & Xia Su, 2011. "On irreversible investment," Finance and Stochastics, Springer, vol. 15(4), pages 607-633, December.
  7. Ioannis Karatzas & Fridrik M. Baldursson, 1996. "Irreversible investment and industry equilibrium (*)," Finance and Stochastics, Springer, vol. 1(1), pages 69-89.
  8. Novshek, William., 1984. "On the Existence of Cournot Equilibrium," Working Papers 517, California Institute of Technology, Division of the Humanities and Social Sciences.
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Cited by:
  1. Giorgio Ferrari & Jan-Henrik Steg & Frank Riedel, 2013. "Continuous-Time Public Good Contribution under Uncertainty," Working Papers 485, Bielefeld University, Center for Mathematical Economics.
  2. Huisman, K.J.M. & Kort, P.M., 2013. "Strategic Capacity Investment Under uncertainty," Discussion Paper 2013-003, Tilburg University, Center for Economic Research.
  3. Giorgio Ferrari, 2012. "On an Integral Equation for the Free Boundary of Stochastic, Irreversible Investment Problems," Working Papers 471, Bielefeld University, Center for Mathematical Economics.
  4. 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.
  5. Giorgio Ferrari, 2012. "On an Integral Equation for the Free-Boundary of Stochastic, Irreversible Investment Problems," Papers 1211.0412, arXiv.org, revised Jul 2013.

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