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Learning and Collusion in New Markets with Uncertain Entry Costs

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Author Info

  • Francis Bloch

    ()
    (Department of Economics, Ecole Polytechnique)

  • Simona Fabrizi

    ()
    (School of Economics and Finance (Albany), Massey University)

  • Steffen Lippert

    ()
    (Department of Economics, University of Otago)

Abstract

This paper analyses an entry timing game with uncertain entry costs. Two firms receive costless signals about the cost of a new project and decide when to invest. We characterize the equilibrium of the investment timing game with private and public signals. We show that competition leads the two firms to invest too early and analyze collusion schemes whereby one firm prevents the other firm from entering the market. We show that, in the efficient collusion scheme, the active firm must transfer a large part of the surplus to the inactive firm in order to limit pre-emption.

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File URL: http://www.business.otago.ac.nz/econ/research/discussionpapers/DP_1112.pdf
File Function: First version, 2011
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Bibliographic Info

Paper provided by University of Otago, Department of Economics in its series Working Papers with number 1112.

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Length: 36 pages
Date of creation: Dec 2011
Date of revision: Dec 2011
Handle: RePEc:otg:wpaper:1112

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Related research

Keywords: Learning; Pre-emption; Innovation; New Markets; Project Selection; Entry Costs; Collusion; Private Information; Market Uncertainty;

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References

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  1. Gandal, N. & Scotchmen, S., 1991. "Coordinating Research Through Research Joint Ventures," Papers, Tel Aviv 6-91, Tel Aviv.
  2. Hugo A. Hopenhayn & Francesco Squintani, 2011. "Preemption Games with Private Information," Review of Economic Studies, Oxford University Press, vol. 78(2), pages 667-692.
  3. Harris, Christopher & Vickers, John, 1985. "Perfect Equilibrium in a Model of a Race," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(2), pages 193-209, April.
  4. Benny Moldovanu & Aner Sela, 2001. "The Optimal Allocation of Prizes in Contests," American Economic Review, American Economic Association, vol. 91(3), pages 542-558, June.
  5. Cripps, Martin William & Keller, Godfrey & Rady, Sven, 2003. "Strategic Experimentation with Exponential Bandits," CEPR Discussion Papers 3814, C.E.P.R. Discussion Papers.
  6. Fabrizi, Simona & Lippert, Steffen & Norback, Pehr-Johan & Persson, Lars, 2007. "Venture Capitalists, Asymmetric Information and Ownership in the Innovation Process," MPRA Paper 6265, University Library of Munich, Germany.
  7. Godfrey Keller & Sven Rady, 1998. "Optimal Experimentation in a Changing Environment," Game Theory and Information, EconWPA 9801001, EconWPA.
  8. Dinah Rosenberg & Eilon Solan & Nicolas Vieille, 2007. "Social Learning in One-Arm Bandit Problems," Econometrica, Econometric Society, Econometric Society, vol. 75(6), pages 1591-1611, November.
  9. Mason, Robin & Weeds, Helen, 2010. "Investment, uncertainty and pre-emption," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 28(3), pages 278-287, May.
  10. Hoppe, Heidrun C. & Lehmann-Grube, Ulrich, 2005. "Innovation timing games: a general framework with applications," Journal of Economic Theory, Elsevier, vol. 121(1), pages 30-50, March.
  11. Pauli Murto & Juuso Välimäki, 2011. "Learning and Information Aggregation in an Exit Game," Review of Economic Studies, Oxford University Press, vol. 78(4), pages 1426-1461.
  12. Reinganum, Jennifer F, 1982. "A Dynamic Game of R and D: Patent Protection and Competitive Behavior," Econometrica, Econometric Society, Econometric Society, vol. 50(3), pages 671-88, May.
  13. Masako Ueda, 2004. "Banks versus Venture Capital: Project Evaluation, Screening, and Expropriation," Journal of Finance, American Finance Association, American Finance Association, vol. 59(2), pages 601-621, 04.
  14. Guiseppe Moscarini & Francesco Squintani, 2004. "Competitive Experimentation with Private Information," Cowles Foundation Discussion Papers 1489, Cowles Foundation for Research in Economics, Yale University.
  15. Harris, Christopher & Vickers, John, 1987. "Racing with Uncertainty," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 54(1), pages 1-21, January.
  16. Ekaterina Goldfain & Eugen Kovac, 2005. "Financing of Competing Projects with Venture Capital," Bonn Econ Discussion Papers, University of Bonn, Germany bgse37_2005, University of Bonn, Germany.
  17. repec:fth:coluec:549 is not listed on IDEAS
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