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Irreversible investment in oligopoly

  • Jan-Henrik Steg

    ()

We offer a new perspective on games of irreversible investment under uncertainty in continuous time. The basis is a particular approach to solve the involved stochastic optimal control problems which allows to establish existence and uniqueness of an oligopolistic open loop equilibrium in a very general framework without reliance on any Markovian property. It simultaneously induces quite natural economic interpretation and predictions by its characterization of optimal strategies through first order conditions. The construction of equilibrium policies is then enabled by a stochastic representation theorem. A stepwise specification of the general model leads to further economic conclusions. We obtain explicit solutions for Lévy processes.

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File URL: http://hdl.handle.net/10.1007/s00780-011-0168-6
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Article provided by Springer in its journal Finance and Stochastics.

Volume (Year): 16 (2012)
Issue (Month): 2 (April)
Pages: 207-224

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Handle: RePEc:spr:finsto:v:16:y:2012:i:2:p:207-224
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  1. Kerry Back & Dirk Paulsen, 2009. "Open-Loop Equilibria and Perfect Competition in Option Exercise Games," Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4531-4552, November.
  2. Frank Riedel & Xia Su, 2011. "On irreversible investment," Finance and Stochastics, Springer, vol. 15(4), pages 607-633, December.
  3. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-85, December.
  4. Novshek, William., 1984. "On the Existence of Cournot Equilibrium," Working Papers 517, California Institute of Technology, Division of the Humanities and Social Sciences.
  5. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, June.
  6. Steven R. Grenadier, 2002. "Option Exercise Games: An Application to the Equilibrium Investment Strategies of Firms," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 691-721.
  7. Bertola, Giuseppe, 1998. "Irreversible investment," Research in Economics, Elsevier, vol. 52(1), pages 3-37, March.
  8. Ioannis Karatzas & Fridrik M. Baldursson, 1996. "Irreversible investment and industry equilibrium (*)," Finance and Stochastics, Springer, vol. 1(1), pages 69-89.
  9. A. Michael Spence, 1979. "Investment Strategy and Growth in a New Market," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 1-19, Spring.
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