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Preemptive Investment Timing

  • David E. Mills

This article examines timing and profits in investment-timing games where two or more firms vie to make an indivisible one-time investment. It shows that whether perfect-Nash equilibrium timing strategies eliminate rents depends on whether it is costly for rivals to threaten preemption credibly. Where credible threats are costless to make, the investor's rents are eliminated by preemptive timing. Where credible threats are costly to make, as where investments are made in steps, however, the equilibrium is nearly the same as where the investor has no rivals. That is, rivals have almost no effect on the investor's timing and profit. These results have close analogies in the literature on patent races and in contestable-market theory.

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Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 19 (1988)
Issue (Month): 1 (Spring)
Pages: 114-122

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Handle: RePEc:rje:randje:v:19:y:1988:i:spring:p:114-122
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