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The Dynamics of Industry Investments

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Author Info

  • Marcel Boyer

    ()

  • Pierre Lasserre

    ()

  • Michel Moreaux

    ()

Abstract

We study the development of a duopoly in a continuous-time model of capacity investment under no commitment by firms regarding future actions. While capacity units are costly, indivisible, durable, and large relative to market size, early entry cannot secure a first-mover advantage and both firms are active beyond some level of market development. We evaluate the investment real options in that context. In the early industry development phase, the sole Markov Perfect Equilibrium (MPE) is a preemption equilibrium with the first industry investment occurring earlier (hence being riskier) than socially optimal. Once both firms hold capacity, tacit collusion, taking the form of postponed capacity investment, may occur as a MPE. Volatility and the expected speed of market development play a crucial role in competitive behavior: we show that the emergence of tacit collusion equilibria is favored by higher demand volatility, faster market growth, as well as by lower discount rate. Nous étudions le développement d'un duopole dans un modèle en temps continu d'investissement en capacité sans engagement des firmes quant à leurs actions futures. Bien que les unités de capacité soient coûteuses, indivisibles, durables et de taille non négligeable par rapport au marché, l'entrée hâtive ne peut conférer d'avantage durable et à partir d'un certain niveau de développement du marché, les deux firmes sont en activité. Nous évaluons les options réelles d'investissement dans ce contexte. Initialement, le seul équilibre Markovien parfait (ÉMP) est un équilibre de préemption dans lequel le premier investissement en capacité se produit plus tôt et comporte un risque plus élevé que socialement désirable. Une collusion tacite pour retarder les augmentations de capacité subséquentes peut devenir possible en ÉMP. La volatilité du marché et sa vitesse de croissance jouent un rôle crucial : l'émergence d'équilibres de collusion tacite est favorisée par une volatilité plus grande, une croissance plus rapide et un taux d'intérêt ou d'actualisation plus faible.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 2007s-09.

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Date of creation: 01 Apr 2007
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Handle: RePEc:cir:cirwor:2007s-09

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Related research

Keywords: real options; duopoly; preemption; collusion; lumpy investment; options réelles; duopole; préemption; collusion; investissement en bloc;

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References

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Citations

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Cited by:
  1. Bruno Versaevel, 2009. "Cumulative Leadership and Entry Dynamics," Post-Print halshs-00371847, HAL.
  2. J.J.J. Thijssen & K.J.M. Huisman & P.M. Kort, 2003. "The Effects of Information on Strategic Investment and Welfare," Trinity Economics Papers 200310, Trinity College Dublin, Department of Economics.
  3. Richard Rubble & Bruno Versaevel, 2008. "On the Tacit Collusion Equilibria of an Investment Timing Game," Post-Print halshs-00373952, HAL.

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