Competition and Irreversible Investments under Uncertainty

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Competition and Irreversible Investments under Uncertainty

Author Info

Michele Moretto () (Università di Padova)

Abstract

We examine the effect of competition on investment decisions in an industry in which each firm has a completely irreversible investment opportunity and the product market has positive externalities for a small market size and negative externalities for a large market size. In the latter case, which corresponds to the traditional competitive industries, firms invest sequentially as market profitability develops. In the former case, which corresponds to industries in which investment is mutually beneficial, firms invest simultaneously after the market's profitability has developed sufficiently to gain all network benefits and to recover the option value of waiting. These extensions of a real options analysis may help explain rapid and sudden developments such as recent Internet investment, or explain the late take-off phenomenon of prolonged start-up problems, such as the case of fax machine production.

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Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0058.

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Length: 28 pages
Date of creation: Nov 2007
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Handle: RePEc:pad:wpaper:0058

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Find related papers by JEL classification:
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy

This paper has been announced in the following NEP Reports:

NEP-ALL-2007-11-24 (All new papers)
NEP-BEC-2007-11-24 (Business Economics)
NEP-COM-2007-11-24 (Industrial Competition)
NEP-MIC-2007-11-24 (Microeconomics)
NEP-NET-2007-11-24 (Network Economics)

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