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The Effects of Information on Strategic Investment and Welfare

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Author Info
J.J.J. Thijssen
K.J.M. Huisman
P.M. Kort

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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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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. 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. [Downloadable!] (restricted)
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  2. Thijssen, Jacco J. J. & Huisman, Kuno J. M. & Kort, Peter M., 2004. "The effect of information streams on capital budgeting decisions," European Journal of Operational Research, Elsevier, vol. 157(3), pages 759-774, September. [Downloadable!] (restricted)
  3. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March. [Downloadable!] (restricted)
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  4. Jensen, Richard, 1992. "Dynamic patent licensing," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 349-368, September. [Downloadable!] (restricted)
  5. Marcel Boyer & Pierre Lasserre & Michel Moreaux, 2007. "The Dynamics of Industry Investments," CIRANO Working Papers 2007s-09, CIRANO. [Downloadable!]
  6. Fudenberg, Drew & Tirole, Jean, 1985. "Preemption and Rent Equilization in the Adoption of New Technology," Review of Economic Studies, Blackwell Publishing, vol. 52(3), pages 383-401, July. [Downloadable!] (restricted)
  7. Jensen, Richard, 1992. "Innovation Adoption and Welfare under Uncertainty," Journal of Industrial Economics, Blackwell Publishing, vol. 40(2), pages 173-80, June. [Downloadable!] (restricted)
  8. 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. [Downloadable!] (restricted)
  9. Weeds, Helen, 2002. "Strategic Delay in a Real Options Model of R&D Competition," Review of Economic Studies, Blackwell Publishing, vol. 69(3), pages 729-47, July.
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  10. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring. [Downloadable!] (restricted)
  11. 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. [Downloadable!]
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  12. 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!]
  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. [Downloadable!] (restricted)
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(explanations, 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. 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. [Downloadable!]
  2. Bruno Versaevel, 2009. "Cumulative Leadership and Entry Dynamics," Post-Print halshs-00371847_v1, HAL. [Downloadable!]
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