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Learning and Collusion in New Markets with Uncertain Entry Costs

  • Francis Bloch


    (Department of Economics, Ecole Polytechnique)

  • Simona Fabrizi


    (School of Economics and Finance (Albany), Massey University)

  • Steffen Lippert


    (Department of Economics, University of Otago)

This paper analyses an entry timing game with uncertain entry costs. Two firms receive costless signals about the cost of a new project and decide when to invest. We characterize the equilibrium of the investment timing game with private and public signals. We show that competition leads the two firms to invest too early and analyze collusion schemes whereby one firm prevents the other firm from entering the market. We show that, in the efficient collusion scheme, the active firm must transfer a large part of the surplus to the inactive firm in order to limit pre-emption.

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Paper provided by University of Otago, Department of Economics in its series Working Papers with number 1112.

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Length: 36 pages
Date of creation: Dec 2011
Date of revision: Dec 2011
Handle: RePEc:otg:wpaper:1112
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  1. Hoppe, Heidrun C. & Lehmann-Grube, Ulrich, 2005. "Innovation timing games: a general framework with applications," Journal of Economic Theory, Elsevier, vol. 121(1), pages 30-50, March.
  2. Jean-Paul Décamps & Thomas Mariotti & Stéphane Villeneuve, 2006. "Irreversible investment in alternative projects," Economic Theory, Springer, vol. 28(2), pages 425-448, 06.
  3. Guiseppe Moscarini & Francesco Squintani, 2004. "Competitive Experimentation with Private Information," Cowles Foundation Discussion Papers 1489, Cowles Foundation for Research in Economics, Yale University.
  4. Cripps, Martin & Keller, Godfrey & Rady, Sven, 2003. "Strategic Experimentation with Exponential Bandits," Discussion Papers in Economics 4, University of Munich, Department of Economics.
  5. Fabrizi, Simona & Lippert, Steffen & Norbäck, Pehr-Johan & Persson, Lars, 2008. "Venture Capitalists, Asymmetric Information, and Ownership in the Innovation Process," Working Paper Series 776, Research Institute of Industrial Economics.
  6. Benny Moldovanu & Aner Sela, 2001. "The Optimal Allocation of Prizes in Contests," American Economic Review, American Economic Association, vol. 91(3), pages 542-558, June.
  7. Gale, D. & Chamley, C., 1992. "Information Revelation and Strategic Delay in a Model of Investment," Papers 10, Boston University - Department of Economics.
  8. 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.
  9. Masako Ueda, 2004. "Banks versus Venture Capital: Project Evaluation, Screening, and Expropriation," Journal of Finance, American Finance Association, vol. 59(2), pages 601-621, 04.
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  11. Jacco Thijssen & Kuno Huisman & Peter Kort, 2006. "The effects of information on strategic investment and welfare," Economic Theory, Springer, vol. 28(2), pages 399-424, 06.
  12. Dinah Rosenberg & Eilon Solan & Nicolas Vieille, 2004. "Social Learning in One-Arm Bandit Problems," Discussion Papers 1396, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Susan Athey & Ilya Segal, 2013. "An Efficient Dynamic Mechanism," Econometrica, Econometric Society, vol. 81(6), pages 2463-2485, November.
  14. Godfrey Keller & Sven Rady, 1999. "Optimal Experimentation in a Changing Environment," Review of Economic Studies, Oxford University Press, vol. 66(3), pages 475-507.
  15. Francesco Squintani & Hugo Hopenhayn, 2005. "Preemption Games with Private Information," 2005 Meeting Papers 80, Society for Economic Dynamics.
  16. Christopher Harris & John Vickers, 1985. "Perfect Equilibrium in a Model of a Race," Review of Economic Studies, Oxford University Press, vol. 52(2), pages 193-209.
  17. Helen Weeds, 2002. "Strategic Delay in a Real Options Model of R&D Competition," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 729-747.
  18. Mason, Robin & Weeds, Helen, 2010. "Investment, uncertainty and pre-emption," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 278-287, May.
  19. repec:inr:wpaper:152574 is not listed on IDEAS
  20. Moscarini, Giuseppe & Squintani, Francesco, 2010. "Competitive experimentation with private information: The survivor's curse," Journal of Economic Theory, Elsevier, vol. 145(2), pages 639-660, March.
  21. Nicolas Vieille & Dinah Rosenberg & Eilon Solan, 2007. "Social Learning in One-Arm Bandit Problems," Post-Print hal-00464609, HAL.
  22. Jean-Jacques Laffont & David Martimort, 1997. "Collusion under Asymmetric Information," Econometrica, Econometric Society, vol. 65(4), pages 875-912, July.
  23. Weeds, H., 2000. "Strategic Delay in a Real Optimna Model of R&D Competition," The Warwick Economics Research Paper Series (TWERPS) 576, University of Warwick, Department of Economics.
  24. Decamps, Jean-Paul & Mariotti, Thomas, 2004. "Investment timing and learning externalities," Journal of Economic Theory, Elsevier, vol. 118(1), pages 80-102, September.
  25. Adam Copeland, 2007. "Learning Dynamics with Private and Public Signals," Economic Theory, Springer, vol. 31(3), pages 523-538, June.
  26. repec:oup:restud:v:78:y:2011:i:4:p:1426-1461 is not listed on IDEAS
  27. Reinganum, Jennifer F, 1982. "A Dynamic Game of R and D: Patent Protection and Competitive Behavior," Econometrica, Econometric Society, vol. 50(3), pages 671-88, May.
  28. Ekaterina Goldfain & Eugen Kovac, 2005. "Financing of Competing Projects with Venture Capital," Bonn Econ Discussion Papers bgse37_2005, University of Bonn, Germany.
  29. Gandal, N. & Scotchmen, S., 1991. "Coordinating Research Through Research Joint Ventures," Papers 6-91, Tel Aviv.
  30. Jay P. Choi, 1991. "Dynamic R&D Competition under "Hazard Rate" Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 596-610, Winter.
  31. Christopher Harris & John Vickers, 1987. "Racing with Uncertainty," Review of Economic Studies, Oxford University Press, vol. 54(1), pages 1-21.
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