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Irreversible Investment with Strategic Interactions

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  • Mason, Robin
  • Weeds, Helen

Abstract

This Paper examines irreversible investment in a project with uncertain returns, when there is an advantage to being the first to invest, and externalities to investing when others also do so. Pre-emption decreases and may even eliminate the option values created by irreversibility and uncertainty. Externalities introduce inefficiencies in investment decisions. Pre-emption and externalities combined can actually hasten, rather than delay, investment, contrary to the usual outcome. These facts demonstrate the importance of extending ‘real options’ analysis to include strategic interactions.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3013.

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Date of creation: Oct 2001
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Handle: RePEc:cpr:ceprdp:3013

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Related research

Keywords: network effects; pre-emption; real options;

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References

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  1. Pindyck, Robert S., 1986. "Irreversible investment, capacity choice, and the value of the firm," Working papers 1802-86., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Weeds, Helen, 2002. "Strategic Delay in a Real Options Model of R&D Competition," Review of Economic Studies, Wiley Blackwell, vol. 69(3), pages 729-47, July.
  3. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
  4. Eric Maskin & Jean Tirole, 2010. "A Theory of Dynamic Oligopoly, 1: Overview and Quantity Competition with Large Fixed Costs," Levine's Working Paper Archive 397, David K. Levine.
  5. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
  6. Fudenberg, Drew & Gilbert, Richard & Stiglitz, Joseph & Tirole, Jean, 1983. "Preemption, leapfrogging and competition in patent races," European Economic Review, Elsevier, vol. 22(1), pages 3-31, June.
  7. Hoppe, Heidrun C., 2000. "Second-mover advantages in the strategic adoption of new technology under uncertainty," International Journal of Industrial Organization, Elsevier, vol. 18(2), pages 315-338, February.
  8. 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.
  9. W.J. Lane, 1980. "Product Differentiation in a Market with Endogenous Sequential Entry," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 237-260, Spring.
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Citations

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Cited by:
  1. Cesare Dosi & Michele Moretto, . "Environmental Innovation, War of Attrition and Investment Grants," Working Papers ubs0406, University of Brescia, Department of Economics.
  2. Michele Moretto, 2003. "Competition and Irreversible Investments under Uncertainty," Working Papers 2003.32, Fondazione Eni Enrico Mattei.
  3. Mason, Robin & Helen Weeds, 2003. "The Failing Firm Defence: Merger Policy and Entry," Royal Economic Society Annual Conference 2003 148, Royal Economic Society.
  4. Ciaran Driver & Paul Temple & Giovanni Urga, 2005. "Explaining the Diversity of Industry Investment Responses to Uncertainty Using Long Run Panel Survey Data," School of Economics Discussion Papers 0405, School of Economics, University of Surrey.
  5. Keppo, Jussi & Lu, Hao, 2003. "Real options and a large producer: the case of electricity markets," Energy Economics, Elsevier, vol. 25(5), pages 459-472, September.

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