Preemption and Rent Dissipation under Bertrand Competition
We study a simple duopoly model of preemption with multiple investments and instantaneous Bertrand competition on a market of finite size driven by stochastic taste shocks. 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 shocks is high, no dissipation of rents occur in equilibrium, despite instantaneous Bertrand competition. If these conditions do not hold, the equilibrium investment timing is suboptimal, and the firms' long-run capacities may depend on the initial market conditions. Our conclusions contrast sharply with standard rent dissipation results.
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