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Preemption and Rent Dissipation under Bertrand Competition

Author

Listed:
  • Marcel Boyer

    (Université de Montréal and CIRANO)

  • Pierre Lasserre

    () (Economics Department, UQAM, GREQAM and CIRANO)

  • Thomas Mariotti

    (London School of Economics and Political Science, GREMAQ and Université de Toulouse I)

  • Michel Moreaux

    (Institut Universitaire de France, Université de Toulouse I, IDEI and LEERNA)

Abstract

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.

Suggested Citation

  • Marcel Boyer & Pierre Lasserre & Thomas Mariotti & Michel Moreaux, 2001. "Preemption and Rent Dissipation under Bertrand Competition," Cahiers de recherche du Département des sciences économiques, UQAM 20-04, Université du Québec à Montréal, Département des sciences économiques.
  • Handle: RePEc:cre:uqamwp:20-04
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    File URL: http://www.unites.uqam.ca/eco/cahiers/wp20-04.pdf
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    References listed on IDEAS

    as
    1. Fudenberg, Drew & Tirole, Jean, 1987. "Understanding Rent Dissipation: On the Use of Game Theory in Industrial Organization," American Economic Review, American Economic Association, pages 176-183.
    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, pages 402-420.
    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, pages 197-212.
    9. Marcel Boyer & Michel Moreaux, 1988. "Rational Rationing in Stackelberg Equilibria," The Quarterly Journal of Economics, Oxford University Press, 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.
    11. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, pages 514-526.
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    Citations

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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, pages 663-681.
    2. Jean-Pierre Ponssard, 2004. "Rent Dissipation in Repeated Entry Games: Some New Results," CESifo Working Paper Series 1186, CESifo Group Munich.
    3. 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).
    4. Boyer, Marcel & Lasserre, Pierre & Moreaux, Michel, 2012. "A dynamic duopoly investment game without commitment under uncertain market expansion," International Journal of Industrial Organization, Elsevier, pages 663-681.
    5. 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.
    6. Marcel Boyer & Pierre Lasserre & Michel Moreaux, 2007. "The Dynamics of Industry Investments," CIRANO Working Papers 2007s-09, CIRANO.
    7. Boyer, Marcel & Robert, Jacques, 2006. "Organizational inertia and dynamic incentives," Journal of Economic Behavior & Organization, Elsevier, vol. 59(3), pages 324-348, March.

    More about this item

    Keywords

    Preemption; rent dissipation; lumpy investment; real options;

    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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