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Lack of Preemption Under Irreversible Investment

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  • Thomas Fagart

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

This article considers the classic model of irreversible investment under imperfect competition and stochastic demand and characterizes the markov perfect equilibrium. To do so, I introduce a new way to define strategies permitting the players to create endogenous jumps in the state variable. The markov equilibrium is then similar to the open-loop equilibrium, meaning that the irreversibility of investment does not create a preemption effect in this model. This is due to the form of investment's cost, which creates an incentive to invest as soon as possible, reducing the strategic interaction to the one of a static problem.

Suggested Citation

  • Thomas Fagart, 2015. "Lack of Preemption Under Irreversible Investment," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01243559, HAL.
    • Handle: RePEc:hal:cesptp:halshs-01243559
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01243559
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    References listed on IDEAS

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    1. Paolo Angelini & Andrea Generale, 2008. "On the Evolution of Firm Size Distributions," American Economic Review, American Economic Association, vol. 98(1), pages 426-438, March.
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    More about this item

    Keywords

    Capacity investment; Cournot competition; Markov-perfect equilibrium; Real option games; Differential games; Investissement en capacité; Concurrence à la Cournot; Equilibre markovien; Option réelle; Jeux différentielle;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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