IDEAS home Printed from https://ideas.repec.org/a/wly/revfec/v14y2005i3-4p209-224.html
   My bibliography  Save this article

Rivalry under price and quantity uncertainty

Author

Listed:
  • Dean Paxson
  • Helena Pinto

Abstract

We present a real option model for a duopoly setting where there are two stochastic factors and where the roles of the players are defined both exogenously and endogenously. The two stochastic factors are the number of units (market volume) and the profit per unit, which may have significantly different drifts and volatilities, and different correlations, depending on market structure and (dis)economies of scale. The paper shows that the degree of correlation between unit profits and market volume might result in different value functions and triggers, especially for followers and simultaneous investors in non‐pre‐emptive games. Monopoly‐like volume is a critical determinant of the leader's trigger in both pre‐emptive and non‐pre‐emptive games. First‐mover advantages are significant in the definition of the leader's optimal entry moment, if the players are fighting for the leader's position (pre‐emptive game).

Suggested Citation

  • Dean Paxson & Helena Pinto, 2005. "Rivalry under price and quantity uncertainty," Review of Financial Economics, John Wiley & Sons, vol. 14(3-4), pages 209-224.
    • Handle: RePEc:wly:revfec:v:14:y:2005:i:3-4:p:209-224
    DOI: 10.1016/j.rfe.2005.04.002
    as

    Download full text from publisher

    File URL: https://doi.org/10.1016/j.rfe.2005.04.002
    Download Restriction: no
    File URL: https://libkey.io/10.1016/j.rfe.2005.04.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Thijssen, J.J.J. & van Damme, E.E.C. & Huisman, K.J.M. & Kort, P.M., 2001. "Investment Under Vanishing Uncertainty Due to Information Arriving Over Time," Discussion Paper 2001-14, Tilburg University, Center for Economic Research.
    2. Helen Weeds, 2002. "Strategic Delay in a Real Options Model of R&D Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(3), pages 729-747.
    3. Lambrecht, Bart & Perraudin, William, 2003. "Real options and preemption under incomplete information," Journal of Economic Dynamics and Control, Elsevier, vol. 27(4), pages 619-643, February.
    4. Huisman, K.J.M. & Kort, P.M., 1999. "Effects of Strategic Interactions on the Option Value of Waiting," Other publications TiSEM a867e9f4-7840-4335-83df-e, Tilburg University, School of Economics and Management.
    5. repec:fth:tilbur:9992 is not listed on IDEAS
    6. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    7. Drew Fudenberg & Jean Tirole, 1985. "Preemption and Rent Equalization in the Adoption of New Technology," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(3), pages 383-401.
    8. Grenadier, Steven R, 1996. "The Strategic Exercise of Options: Development Cascades and Overbuilding in Real Estate Markets," Journal of Finance, American Finance Association, vol. 51(5), pages 1653-1679, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Marius Sorin DINCA, 2022. "Using the Relation Between Quantity, Cost and Price to Increase Company Profit under Existing Production Capacity," Economics and Applied Informatics, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, issue 2, pages 54-60.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chevalier-Roignant, Benoît & Flath, Christoph M. & Huchzermeier, Arnd & Trigeorgis, Lenos, 2011. "Strategic investment under uncertainty: A synthesis," European Journal of Operational Research, Elsevier, vol. 215(3), pages 639-650, December.
    2. Thijssen, Jacco J.J. & Huisman, Kuno J.M. & Kort, Peter M., 2012. "Symmetric equilibrium strategies in game theoretic real option models," Journal of Mathematical Economics, Elsevier, vol. 48(4), pages 219-225.
    3. Yao-Wen Hsu & Bart Lambrecht, 2007. "Preemptive patenting under uncertainty and asymmetric information," Annals of Operations Research, Springer, vol. 151(1), pages 5-28, April.
    4. Paxson, Dean & Pinto, Helena, 2005. "Rivalry under price and quantity uncertainty," Review of Financial Economics, Elsevier, vol. 14(3-4), pages 209-224.
    5. Thijssen, J.J.J., 2003. "Investment under uncertainty, market evolution and coalition spillovers in a game theoretic perspective," Other publications TiSEM 672073a6-492e-4621-8d4a-0, Tilburg University, School of Economics and Management.
    6. Femminis, Gianluca & Martini, Gianmaria, 2011. "Irreversible investment and R&D spillovers in a dynamic duopoly," Journal of Economic Dynamics and Control, Elsevier, vol. 35(7), pages 1061-1090, July.
    7. Gorno, Leandro & Iachan, Felipe S., 2020. "Competitive real options under private information," Journal of Economic Theory, Elsevier, vol. 185(C).
    8. Bruno Versaevel, 2015. "Alertness, Leadership, and Nascent Market Dynamics," Dynamic Games and Applications, Springer, vol. 5(4), pages 440-466, December.
    9. 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.
    10. Bart M. Lambrecht & Grzegorz Pawlina, 2010. "Corporate Finance and the (In)efficient Exercise of Real Options," Multinational Finance Journal, Multinational Finance Journal, vol. 14(3-4), pages 189-217, September.
    11. Marcel Boyer & Pierre Lasserre & Michel Moreaux, 2007. "The Dynamics of Industry Investments," CIRANO Working Papers 2007s-09, CIRANO.
    12. 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.
    13. Gianluca Femminis & Gianmaria Martini, 2008. "Irreversible R&D investment with inter-firm spillovers," DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi compila la segreteria, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    14. Hans Haanappel & Han Smit, 2007. "Return distributions of strategic growth options," Annals of Operations Research, Springer, vol. 151(1), pages 57-80, April.
    15. Colombo, Luca & Labrecciosa, Paola, 2021. "A stochastic differential game of duopolistic competition with sticky prices," Journal of Economic Dynamics and Control, Elsevier, vol. 122(C).
    16. Bustamante, Maria Cecilia, 2011. "Strategic investment, industry concentration and the cross section of returns," LSE Research Online Documents on Economics 37454, London School of Economics and Political Science, LSE Library.
    17. Billette de Villemeur, Etienne & Ruble, Richard & Versaevel, Bruno, 2014. "Investment timing and vertical relationships," International Journal of Industrial Organization, Elsevier, vol. 33(C), pages 110-123.
    18. Grzegorz Pawlina & Peter M. Kort, 2006. "Real Options in an Asymmetric Duopoly: Who Benefits from Your Competitive Disadvantage?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 1-35, March.
    19. Adriana Breccia & Hector Salgado-Banda, 2006. "Competing or Colluding in a Stochastic Environment," Computing in Economics and Finance 2006 423, Society for Computational Economics.
    20. Tetsuya Kasahara, 2015. "Strategic Technology Adoption Under Dispersed Information and Information Learning," International Journal of Innovation and Technology Management (IJITM), World Scientific Publishing Co. Pte. Ltd., vol. 12(06), pages 1-18, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:revfec:v:14:y:2005:i:3-4:p:209-224. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1002/(ISSN)1873-5924 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.