Preemption and Rent Dissipation under Bertrand Competition
AbstractWe study a simple duopoly model of preemption with multiple investments and instantaneous Bertrand competition on a market of finite size driven by stochastic taste shocks. 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 shocks is high, no dissipation of rents occur in equilibrium, despite instantaneous Bertrand competition. If these conditions do not hold, the equilibrium investment timing is suboptimal, and the firms' long-run capacities may depend on the initial market conditions. Our conclusions contrast sharply with standard rent dissipation results.
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Bibliographic InfoPaper provided by Université du Québec à Montréal, Département des sciences économiques in its series Cahiers de recherche du Département des sciences économiques, UQAM with number 20-04.
Date of creation: Feb 2001
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Preemption; rent dissipation; lumpy investment; real options;
Find related papers by JEL classification:
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Financing, Investment, and Capacity
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-02-08 (All new papers)
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