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Irreversible Investment under Competition with a Markov Switching Regime

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Author Info

  • Makoto Goto

    ()
    (Graduate School of Economics and Business Administration, Hokkaido University)

  • Katsumasa Nishide

    ()
    (Department of Economics, Yokohama National University)

  • Ryuta Takashima

    ()
    (Faculty of Science and Technology, Tokyo University of Science)

Abstract

In this paper, we study an investment problem in which two asymmetric firms face competition and the regime characterizing economic conditions follows Markov switching. We derive the value functions and investment thresholds of a leader and a follower. One of the interesting results is that in contrast to the case of no regime switching, even if the current market size is small, both advantaged and disadvantaged firms have an incentive to become a leader in some parameter settings.

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Bibliographic Info

Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 861.

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Date of creation: Apr 2013
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Handle: RePEc:kyo:wpaper:861

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Keywords: Real options; Competition; Timing game; Regime switch;

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References

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  1. Nielsen, Martin J., 2002. "Competition and irreversible investments," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 731-743, May.
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  10. John Driffill & Martin Sola & Turalay Kenc, 2009. "Real Options with Priced Regime-Switching Risk," Department of Economics Working Papers 2009-09, Universidad Torcuato Di Tella.
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  12. Nishide, Katsumasa & Nomi, Ernesto Kazuhiro, 2009. "Regime uncertainty and optimal investment timing," Journal of Economic Dynamics and Control, Elsevier, vol. 33(10), pages 1796-1807, October.
  13. Huisman, K.J.M. & Kort, P.M., 2013. "Strategic Capacity Investment Under uncertainty," Discussion Paper 2013-003, Tilburg University, Center for Economic Research.
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Cited by:
  1. Katsumasa Nishide & Kyoko Yagi, 2013. "Competition and the Bad News Principle in a Real Options Framework," KIER Working Papers 860, Kyoto University, Institute of Economic Research.

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