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Investment in oligopoly under uncertainty: The accordion effect

  • Bouis, Romain
  • Huisman, Kuno
  • Kort, Peter M.

This paper studies investments in new markets where more than two (anticipated) identical competitors are present. In case of three firms an accordion effect is detected: an exogenous demand shock results in a change of the wedge between investment thresholds of the first and second investor that is qualitatively different from the change of the wedge between the second and third investment threshold. Furthermore, it turns out that in the three-firm case the investment timing of the first investor lies in between the one and the two-firm case. These results are numerically extended to the n-firm case.

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File URL: http://basepub.dauphine.fr/xmlui/bitstream/123456789/12655/1/kuno.pdf
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Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/12655.

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Date of creation: 2009
Date of revision:
Publication status: Published in International Journal of Industrial Organization, 2009, Vol. 27, no. 2. pp. 320-331.Length: 11 pages
Handle: RePEc:dau:papers:123456789/12655
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  1. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
  2. Baldursson, Fridrik M., 1998. "Irreversible investment under uncertainty in oligopoly," Journal of Economic Dynamics and Control, Elsevier, vol. 22(4), pages 627-644, April.
  3. Leahy, John V, 1993. "Investment in Competitive Equilibrium: The Optimality of Myopic Behavior," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 1105-33, November.
  4. Nielsen, Martin J., 2002. "Competition and irreversible investments," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 731-743, May.
  5. 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.
  6. repec:dgr:kubcen:20036 is not listed on IDEAS
  7. Bouis, R. & Huisman, K.J.M. & Kort, P.M., 2006. "Investment in Oligopoly under Uncertainty : The Accordion Effect," Discussion Paper 2006-69, Tilburg University, Center for Economic Research.
  8. Fudenberg, Drew & Tirole, Jean, 1985. "Preemption and Rent Equilization in the Adoption of New Technology," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 383-401, July.
  9. repec:ner:tilbur:urn:nbn:nl:ui:12-84087 is not listed on IDEAS
  10. Pawlina, G. & Kort, P.M., 2001. "Real Options in an Aymmetric Duopoly : Who Benefits from your Competitive Disadvantage," Discussion Paper 2001-95, Tilburg University, Center for Economic Research.
  11. repec:ner:tilbur:urn:nbn:nl:ui:12-142400 is not listed on IDEAS
  12. repec:dgr:kubcen:200281 is not listed on IDEAS
  13. Steven R. Grenadier, 2000. "Option Exercise Games: The Intersection Of Real Options And Game Theory," Journal of Applied Corporate Finance, Morgan Stanley, vol. 13(2), pages 99-107.
  14. Huisman, K.J.M. & Kort, P.M. & Pawlina, G. & Thijssen, J.J.J., 2003. "Strategic Investment Under Uncertainty : Merging Real Options with Game Theory," Discussion Paper 2003-6, Tilburg University, Center for Economic Research.
  15. repec:dgr:kubcen:200669 is not listed on IDEAS
  16. Sarkar, Sudipto, 2000. "On the investment-uncertainty relationship in a real options model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(2), pages 219-225, February.
  17. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474, April.
  18. Thijssen, J.J.J. & Huisman, K.J.M. & Kort, P.M., 2002. "Symmetric Equilibrium Strategies in Game Theoretical Real Option Models," Discussion Paper 2002-81, Tilburg University, Center for Economic Research.
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