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Preemptive competition between two firms with different discount rates

Author

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  • Michi NISHIHARA

    (Graduate School of Economics, Osaka University)

Abstract

This paper studies a real options duopoly game between two firms with different time discount rates. I derive the order of investments, investment thresholds, and firm values in equilibrium. With no cost disadvantage, the patient firm enters the market earlier and gains more value than does the impatient opponent. When the patient firm has a cost disadvantage, the order of market entry can depend on the market characteristics. With a weaker first-mover advantage, higher market volatility, and lower market growth rate, the impatient firm is more likely to be the first mover. Notably, the patient firm can earn more than the impatient firm, even though the patient firm enters the market later. These results are consistent with empirical findings on market entry timing.

Suggested Citation

  • Michi NISHIHARA, 2020. "Preemptive competition between two firms with different discount rates," Discussion Papers in Economics and Business 20-04, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:2004
    as

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    File URL: http://www2.econ.osaka-u.ac.jp/econ_society/dp/2004.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    real options; timediscounting; marketentrytiming; preemption;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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