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Strategic investment with positive externalities

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  • Steg, Jan-Henrik
  • Thijssen, Jacco J.J.

Abstract

We study strategic investment in continuous time with positive externalities of changing magnitude. Our model particularly allows for two correlated risk factors. Constructing subgame-perfect equilibria with pure and mixed strategies, we observe the novel effect that it is important for the firms to anticipate preemption. In fact, the presence of a second risk factor implies also an additional strategic risk. We quantify the associated extra waiting cost and show that it is ex ante uncertain whether investment will happen when there is a first- or a second-mover advantage. Our formal arguments involve several methodological contributions. In addition, we provide detailed specifications of our basic model to address various applications.

Suggested Citation

  • Steg, Jan-Henrik & Thijssen, Jacco J.J., 2023. "Strategic investment with positive externalities," Games and Economic Behavior, Elsevier, vol. 138(C), pages 1-21.
    • Handle: RePEc:eee:gamebe:v:138:y:2023:i:c:p:1-21
    DOI: 10.1016/j.geb.2022.11.013
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    References listed on IDEAS

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    More about this item

    Keywords

    Real options; Externalities; Preemption; War of attrition; Optimal stopping; Multi-dimensional;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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