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Investment in oligopoly under uncertainty : the accordion effect

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Author Info
Bouis, Romain
Huisman, Kuno J.M.
Kort, Peter M. (Tilburg University, Center for Economic Research)

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Abstract

In the strategic investment under uncertainty literature the trade off between the value of waiting known from single decision maker models and the incentive to preempt competitors is mainly studied in duopoly models. This paper aims at studying competitive investments in new markets where more than two (potential) competitors are present. In case of three firms an accordion effect in terms of investment thresholds is detected in the sense that an exogenous demand shock results in a change of the wedge between the investment thresholds of the first and second investors that is qualitatively different from the change of the wedge between the second and third investment threshold. This result extends to the n firm case. We show that a direct implication of the accordion effect is that there are two types of equilibria in the three firm case. In the first type all firms invest sequentially and in the second type the first two investors invest simultaneously and the third investor invests at a later moment. If we consider sequential equilibria and compare entry times of the first investors for different potential market sizes, it turns out that in the two firm case the first investor invests earlier than in the monopoly case, in the three firm case the investment timing lies in between the one and the two firm case, the four firm case lies in between the two and the three firm case, and so on and so forth. Hence, a policy maker interested in an early start up should hope for an even number of competitors, although for n large the investment times of the first investors are almost equal.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 69.

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Date of creation: 2006
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Handle: RePEc:dgr:kubcen:200669

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Find related papers by JEL classification:
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Steven R. Grenadier, 2002. "Option Exercise Games: An Application to the Equilibrium Investment Strategies of Firms," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 15(3), pages 691-721.
  2. Thijssen, J.J.J. & Huisman, K.J.M. & Kort, P.M., 2002. "Symmetric equilibrium strategies in game theoretical real option models," Discussion Paper 81, Tilburg University, Center for Economic Research. [Downloadable!]
  3. Sarkar, Sudipto, 2000. "On the investment-uncertainty relationship in a real options model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(2), pages 219-225, February. [Downloadable!] (restricted)
  4. Nielsen, Martin J., 2002. "Competition and irreversible investments," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 731-743, May. [Downloadable!] (restricted)
  5. Kort, P.M. & Huisman, K.J.M. & Pawlina, G. & Thijssen, J.J., 2003. "Strategic investment under uncertainty: merging real options with game theory," Discussion Paper 6, Tilburg University, Center for Economic Research. [Downloadable!]
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  1. Andreas Park & Lones Smith, 2008. "Caller Number Five and Related Timing Games," Working Papers tecipa-317, University of Toronto, Department of Economics. [Downloadable!]
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