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Preemption and Rent Dissipation with Multiple Investments

Author

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  • Marcel Boyer
  • Pierre Lasserre
  • Thomas Mariotti
  • Michel Moreaux

Abstract

We study a simple duopoly model of preemption with multiple investments and instantaneous Bertrand competition in a stochastically growing market. Different patterns of equilibria may arise, depending on the importance of the real option effect. If the average growth rate of the market is close to the risk free rate, or if the volatility of demand changes is high, the unique equilibrium acquisition process involves joint adoption at the socially optimal date. If these conditions do not hold, the equilibrium investment timing is suboptimal, and the firms' long-run capacities depend on the initial market conditions. However, under a broad set of empirically relevant parameters, no dissipation of rents occur in equilibrium, despite instantaneous Bertrand competition. This casts some doubts on the robustness of one-shot models of preemption. Dans cet article, nous étudions un modèle (duopole) de préemption avec investissements multiples et concurrence instantanée à la Bertrand dans un marché à croissance stochastique. Différentes configurations d'équilibre peuvent apparaître en fonction de l'importance de l'effet d'option réelle. Si le taux de croissance moyen du marché s'approche du taux d'intérêt sans risque, ou si la volatilité de la demande est élevée, l'unique processus d'investissement d'équilibre implique une adoption conjointe à la date socialement optimale. En l'absence de ces conditions, la séquence d'investissement d'équilibre n'est pas optimale et les capacités à long terme des entreprises dépendent des conditions de marché initiales. Cependant, pour un large éventail de valeurs des paramètres pertinents, aucune dissipation de rentes ne se produit à l'équilibre, malgré la concurrence à la Bertrand. Ceci jette quelques doutes sur la robustesse des résultats des modèles de préemption à une période.

Suggested Citation

  • Marcel Boyer & Pierre Lasserre & Thomas Mariotti & Michel Moreaux, 2000. "Preemption and Rent Dissipation with Multiple Investments," CIRANO Working Papers 2000s-06, CIRANO.
  • Handle: RePEc:cir:cirwor:2000s-06
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    File URL: http://www.cirano.qc.ca/files/publications/2000s-06.pdf
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    References listed on IDEAS

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    1. Fudenberg, Drew & Tirole, Jean, 1987. "Understanding Rent Dissipation: On the Use of Game Theory in Industrial Organization," American Economic Review, American Economic Association, vol. 77(2), pages 176-183, May.
    2. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
    3. Boyer, Marcel & Moreaux, Michel, 1989. "Endogenous Rationing in a Differentiated Product Duopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 877-888, November.
    4. Posner, Richard A, 1975. "The Social Costs of Monopoly and Regulation," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 807-827, August.
    5. B. Curtis Eaton & Richard G. Lipsey, 1981. "Capital, Commitment, and Entry Equilibrium," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 593-604, Autumn.
    6. Katz, Michael L & Shapiro, Carl, 1987. "R&D Rivalry with Licensing or Imitation," American Economic Review, American Economic Association, vol. 77(3), pages 402-420, June.
    7. Drew Fudenberg & Jean Tirole, 1985. "Preemption and Rent Equalization in the Adoption of New Technology," Review of Economic Studies, Oxford University Press, vol. 52(3), pages 383-401.
    8. Richard J. Gilbert & Richard G. Harris, 1984. "Competition with Lumpy Investment," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 197-212, Summer.
    9. Marcel Boyer & Michel Moreaux, 1988. "Rational Rationing in Stackelberg Equilibria," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 409-414.
    10. John V. Leahy, 1993. "Investment in Competitive Equilibrium: The Optimality of Myopic Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 108(4), pages 1105-1133.
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    Cited by:

    1. Boyer, Marcel & Moreaux, Michel, 2000. "Flexibilité et stratégies d’impartition," L'Actualité Economique, Société Canadienne de Science Economique, vol. 76(2), pages 199-224, juin.

    More about this item

    Keywords

    Preemption; rent dissipation; investment under uncertainty; Préemption; dissipation de rentes; investissement sous incertitude;

    JEL classification:

    • 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
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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