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The Effects of Information on Strategic Investment and Welfare

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  • J.J.J. Thijssen
  • K.J.M. Huisman
  • P.M. Kort

Abstract

A model is considered where two firms compete in investing in a risky project. At certain points in time the firms obtain imperfect information about the profitability of the project. We impose that investing first can be beneficial because a Stackelberg advantage, and thus a higher market share, is obtained. On the other hand, investing as second implies that one can benefit from an information spillover generated by the investment of the other firm. Consequently, in equilibrium there is either a preemption situation or a war of attrition. In case no investment takes place during the war of attrition, this war of attrition can turn into a preemption situation. One counterintuitive result is that welfare can be negatively affected by signals becoming more informative or by occuring more frequently. Furthermore, simulations indicate that duopoly leads to higher welfare than monopoly when signals are less informative, wheras the opposite holds if there is more or better information.

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Bibliographic Info

Paper provided by Trinity College Dublin, Department of Economics in its series Trinity Economics Papers with number 200310.

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Date of creation: 2003
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Handle: RePEc:tcd:tcduee:200310

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  1. Thijssen, J.J.J. & Huisman, K.J.M. & Kort, P.M., 2004. "The effect of information streams on capital budgeting decisions," Open Access publications from Tilburg University urn:nbn:nl:ui:12-140877, Tilburg University.
  2. Dixit, Avinash, 1979. "The Role of Investment in Entry-Deterrence," The Warwick Economics Research Paper Series (TWERPS) 140, University of Warwick, Department of Economics.
  3. Weeds, Helen, 2002. "Strategic Delay in a Real Options Model of R&D Competition," Review of Economic Studies, Wiley Blackwell, vol. 69(3), pages 729-47, July.
  4. Huisman, K.J.M., 2000. "Technology Investment: A Game Theoretic Real Options Approach," Open Access publications from Tilburg University urn:nbn:nl:ui:12-84087, Tilburg University.
  5. Hoppe, Heidrun C., 2000. "Second-mover advantages in the strategic adoption of new technology under uncertainty," International Journal of Industrial Organization, Elsevier, vol. 18(2), pages 315-338, February.
  6. Bart Lambrecht & William Perraudin, 1996. "Real Options and Preemption," Archive Working Papers 026, Birkbeck, Department of Economics, Mathematics & Statistics.
  7. Alvarez, Luis H. R. & Stenbacka, Rune, 2001. "Adoption of uncertain multi-stage technology projects: a real options approach," Journal of Mathematical Economics, Elsevier, vol. 35(1), pages 71-97, February.
  8. Marcel Boyer & Pierre Lasserre & Thomas Mariotti & Michel Moreaux, 2001. "Real Options, Preemption, and the Dynamics of Industry Investments," Cahiers de recherche du Département des sciences économiques, UQAM 20-10, Université du Québec à Montréal, Département des sciences économiques.
  9. Jensen, Richard, 1992. "Dynamic patent licensing," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 349-368, September.
  10. Marcel Boyer & Pierre Lasserre & Michel Moreaux, 2007. "The Dynamics of Industry Investments," CIRANO Working Papers 2007s-09, CIRANO.
  11. Hendricks, Ken & Weiss, Andrew & Wilson, Charles A, 1988. "The War of Attrition in Continuous Time with Complete Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(4), pages 663-80, November.
  12. Jensen, Richard, 1992. "Innovation Adoption and Welfare under Uncertainty," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 173-80, June.
  13. Jensen, Richard, 1982. "Adoption and diffusion of an innovation of uncertain profitability," Journal of Economic Theory, Elsevier, vol. 27(1), pages 182-193, June.
  14. Thijssen, J.J.J. & Huisman, K.J.M. & Kort, P.M., 2002. "Symmetric Equilibrium Strategies in Game Theoretical Real Option Models," Discussion Paper 2002-81, Tilburg University, Center for Economic Research.
  15. Fudenberg, Drew & Tirole, Jean, 1985. "Preemption and Rent Equilization in the Adoption of New Technology," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 383-401, July.
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Cited by:
  1. Broll, Udo & Eckwert, Bernhard & Eickhoff, Andreas, 2011. "Transparency in the banking sector," Dresden Discussion Paper Series in Economics 05/11, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  2. Jacco Thijssen, 2007. "Ramsey Waits: A Theory of Non-Exclusive Real Options with First-Mover Advantages," Discussion Papers 07/17, Department of Economics, University of York.
  3. Bruno Versaevel, 2009. "Cumulative Leadership and Entry Dynamics," Working Papers 0906, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  4. Drees, Burkhard & Eckwert, Bernhard, 2010. "Implications of more precise information for technological development and economic welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 34(2), pages 266-279, February.
  5. Etienne Billette de Villemeur & Richard Ruble & Bruno Versaevel, 2011. "Coordination and Cooperation in Investment Timing with Externalities?," Working Papers 1128, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  6. Leung, Chi Man & Kwok, Yue Kuen, 2012. "Patent-investment games under asymmetric information," European Journal of Operational Research, Elsevier, vol. 223(2), pages 441-451.
  7. Broll, Udo & Eckwert, Bernhard & Eickhoff, Andreas, 2012. "Financial intermediation and endogenous risk in the banking sector," Economic Modelling, Elsevier, vol. 29(5), pages 1618-1622.
  8. Vedel, Suzanne Elizabeth & Thorsen, Bo Jellesmark & Jacobsen, Jette Bredahl, 2009. "First-movers, non-movers, and social gains from subsidising entry in markets for nature-based recreational goods," Ecological Economics, Elsevier, vol. 68(8-9), pages 2363-2371, June.
  9. Graham, Jeffrey, 2011. "Strategic real options under asymmetric information," Journal of Economic Dynamics and Control, Elsevier, vol. 35(6), pages 922-934, June.

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