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Preemptive Investment Timing

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  • David E. Mills

Abstract

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.

Suggested Citation

  • David E. Mills, 1988. "Preemptive Investment Timing," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 114-122, Spring.
    • Handle: RePEc:rje:randje:v:19:y:1988:i:spring:p:114-122
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    Cited by:

    1. Boyer, Marcel & Lasserre, Pierre & Moreaux, Michel, 2012. "A dynamic duopoly investment game without commitment under uncertain market expansion," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 663-681.
    2. Boyer, Marcel & Lasserre, Pierre & Moreaux, Michel, 2010. "A Dynamic Duopoly Investment Game under Uncertain Market Growth," TSE Working Papers 10-171, Toulouse School of Economics (TSE).
    3. Marcel Boyer & Pierre Lasserre & Thomas Mariotti & Michel Moreaux, 2001. "Real Options, Preemption, and the Dynamics of Industry Investments," CIRANO Working Papers 2001s-64, CIRANO.
    4. Rossella Argenziano & Philipp Schmidt-Dengler, 2014. "Clustering In N-Player Preemption Games," Journal of the European Economic Association, European Economic Association, vol. 12(2), pages 368-396, April.
    5. Jinsoo Yoo, 2000. "A Theory of Industry Life Cycle," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 25(1), pages 155-172, June.
    6. Wallace, Rodney B., 2003. "Environments that facilitate collusive non-investment:: Theory and application to Japan's period of rapid development," Journal of the Japanese and International Economies, Elsevier, vol. 17(2), pages 213-225, June.
    7. repec:esx:essedp:741 is not listed on IDEAS
    8. Bergman, Mats A., 1998. "Endogenous Timing of Investments Yields Modified Stackelberg Outcomes," SSE/EFI Working Paper Series in Economics and Finance 272, Stockholm School of Economics.
    9. Azevedo, Alcino & Paxson, Dean, 2014. "Developing real option game models," European Journal of Operational Research, Elsevier, vol. 237(3), pages 909-920.
    10. Marcel Boyer & Pierre Lasserre & Michel Moreaux, 2007. "The Dynamics of Industry Investments," CIRANO Working Papers 2007s-09, CIRANO.
    11. Rossella Argenziano & Philipp Schmidt-Dengler, 2014. "Clustering In N-Player Preemption Games," Journal of the European Economic Association, European Economic Association, vol. 12(2), pages 368-396, 04.
    12. Moretto, Michele, 2000. "Irreversible investment with uncertainty and strategic behavior," Economic Modelling, Elsevier, vol. 17(4), pages 589-617, December.

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