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Preemption and Rent Dissipation with Multiple Investments

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  • Marcel Boyer

    ()

  • Pierre Lasserre

    ()

  • Thomas Mariotti
  • Michel Moreaux

    ()

Abstract

We study a simple duopoly model of preemption with multiple investments and instantaneous Bertrand competition in a stochastically growing market. Different patterns of equilibria may arise, depending on the importance of the real option effect. If the average growth rate of the market is close to the risk free rate, or if the volatility of demand changes is high, the unique equilibrium acquisition process involves joint adoption at the socially optimal date. If these conditions do not hold, the equilibrium investment timing is suboptimal, and the firms' long-run capacities depend on the initial market conditions. However, under a broad set of empirically relevant parameters, no dissipation of rents occur in equilibrium, despite instantaneous Bertrand competition. This casts some doubts on the robustness of one-shot models of preemption. Dans cet article, nous étudions un modèle (duopole) de préemption avec investissements multiples et concurrence instantanée à la Bertrand dans un marché à croissance stochastique. Différentes configurations d'équilibre peuvent apparaître en fonction de l'importance de l'effet d'option réelle. Si le taux de croissance moyen du marché s'approche du taux d'intérêt sans risque, ou si la volatilité de la demande est élevée, l'unique processus d'investissement d'équilibre implique une adoption conjointe à la date socialement optimale. En l'absence de ces conditions, la séquence d'investissement d'équilibre n'est pas optimale et les capacités à long terme des entreprises dépendent des conditions de marché initiales. Cependant, pour un large éventail de valeurs des paramètres pertinents, aucune dissipation de rentes ne se produit à l'équilibre, malgré la concurrence à la Bertrand. Ceci jette quelques doutes sur la robustesse des résultats des modèles de préemption à une période.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 2000s-06.

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Date of creation: 01 Feb 2000
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Handle: RePEc:cir:cirwor:2000s-06

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Related research

Keywords: Preemption; rent dissipation; investment under uncertainty; Préemption; dissipation de rentes; investissement sous incertitude;

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References

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  1. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
  2. Posner, Richard A, 1975. "The Social Costs of Monopoly and Regulation," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 807-27, August.
  3. Leahy, John V, 1993. "Investment in Competitive Equilibrium: The Optimality of Myopic Behavior," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 1105-33, November.
  4. Boyer, M. & Moreaux, M., 1986. "Rational Rationing in Stackelerbg Equilibria," Cahiers de recherche 8631, Universite de Montreal, Departement de sciences economiques.
  5. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-26, June.
  6. Boyer, M. & Moreaux, M., 1988. "Endogenous Rationing in a Differentiated Product Duopoly," Cahiers de recherche 8830, Universite de Montreal, Departement de sciences economiques.
  7. Fudenberg, Drew & Tirole, Jean, 1987. "Understanding Rent Dissipation: On the Use of Game Theory in Industrial Organization," American Economic Review, American Economic Association, vol. 77(2), pages 176-83, May.
  8. B. Curtis Eaton & Richard G. Lipsey, 1980. "Capital, Commitment, and Entry Equilibrium," Working Papers 397, Queen's University, Department of Economics.
  9. Richard J. Gilbert & Richard G. Harris, 1984. "Competition with Lumpy Investment," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 197-212, Summer.
  10. Katz, Michael L & Shapiro, Carl, 1987. "R&D Rivalry with Licensing or Imitation," American Economic Review, American Economic Association, vol. 77(3), pages 402-20, June.
  11. Fudenberg, Drew & Tirole, Jean, 1985. "Preemption and Rent Equilization in the Adoption of New Technology," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 383-401, July.
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Cited by:
  1. Décamps, Jean-Paul & Mariotti, Thomas, 2000. "Irreversible Investment and Learning Externalities," IDEI Working Papers 97, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Boyer, Marcel & Moreaux, Michel, 2000. "Flexibilité et stratégies d’impartition," L'Actualité Economique, Société Canadienne de Science Economique, vol. 76(2), pages 199-224, juin.

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