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The Effects of Information on Strategic Investment and Welfare

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  • J.J.J. Thijssen
  • K.J.M. Huisman
  • P.M. Kort

Abstract

A model is considered where two firms compete in investing in a risky project. At certain points in time the firms obtain imperfect information about the profitability of the project. We impose that investing first can be beneficial because a Stackelberg advantage, and thus a higher market share, is obtained. On the other hand, investing as second implies that one can benefit from an information spillover generated by the investment of the other firm. Consequently, in equilibrium there is either a preemption situation or a war of attrition. In case no investment takes place during the war of attrition, this war of attrition can turn into a preemption situation. One counterintuitive result is that welfare can be negatively affected by signals becoming more informative or by occuring more frequently. Furthermore, simulations indicate that duopoly leads to higher welfare than monopoly when signals are less informative, wheras the opposite holds if there is more or better information.

Suggested Citation

  • J.J.J. Thijssen & K.J.M. Huisman & P.M. Kort, 2003. "The Effects of Information on Strategic Investment and Welfare," Trinity Economics Papers 200310, Trinity College Dublin, Department of Economics.
  • Handle: RePEc:tcd:tcduee:200310
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    Cited by:

    1. Bruno Versaevel, 2009. "Cumulative Leadership and Entry Dynamics," Post-Print halshs-00371847, HAL.
    2. repec:cty:dpaper:8121 is not listed on IDEAS
    3. Broll, Udo & Eckwert, Bernhard & Eickhoff, Andreas, 2012. "Financial intermediation and endogenous risk in the banking sector," Economic Modelling, Elsevier, vol. 29(5), pages 1618-1622.
    4. Francis Bloch & Simona Fabrizi & Steffen Lippert, 2015. "Learning and collusion in new markets with uncertain entry costs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 273-303.
    5. Motchenkova, E., 2005. "Optimal enforcement of competition law," Other publications TiSEM 1e37f346-d6d7-453d-beb6-8, Tilburg University, School of Economics and Management.
    6. Leung, Chi Man & Kwok, Yue Kuen, 2012. "Patent-investment games under asymmetric information," European Journal of Operational Research, Elsevier, vol. 223(2), pages 441-451.
    7. Billette de Villemeur, Etienne & Ruble, Richard & Versaevel, Bruno, 2015. "On the timing of innovation and imitation," MPRA Paper 69161, University Library of Munich, Germany.
    8. Drees, Burkhard & Eckwert, Bernhard, 2010. "Implications of more precise information for technological development and economic welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 34(2), pages 266-279, February.
    9. repec:kap:annfin:v:13:y:2017:i:4:d:10.1007_s10436-017-0304-1 is not listed on IDEAS
    10. Chevalier-Roignant, Benoît & Flath, Christoph M. & Huchzermeier, Arnd & Trigeorgis, Lenos, 2011. "Strategic investment under uncertainty: A synthesis," European Journal of Operational Research, Elsevier, vol. 215(3), pages 639-650, December.
    11. Billette de Villemeur, Etienne & Ruble, Richard & Versaevel, Bruno, 2014. "Innovation and imitation incentives in dynamic duopoly," MPRA Paper 59453, University Library of Munich, Germany.
    12. Broll, Udo & Eckwert, Bernhard & Eickhoff, Andreas, 2011. "Transparency in the banking sector," Dresden Discussion Paper Series in Economics 05/11, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    13. Billette de Villemeur, Etienne & Ruble, Richard & Versaevel, Bruno, 2016. "When should a winner take all, or pay some? Innovation and imitation incentives in a dynamic duopoly," MPRA Paper 75465, University Library of Munich, Germany.
    14. Jacco Thijssen, 2007. "Ramsey Waits: A Theory of Non-Exclusive Real Options with First-Mover Advantages," Discussion Papers 07/17, Department of Economics, University of York.
    15. Graham, Jeffrey, 2011. "Strategic real options under asymmetric information," Journal of Economic Dynamics and Control, Elsevier, vol. 35(6), pages 922-934, June.
    16. Etienne Billette de Villemeur & Richard Ruble & Bruno Versaevel, 2011. "Coordination and Cooperation in Investment Timing with Externalities?," Working Papers 1128, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    17. Svetlana Boyarchenko & Sergei Levendorskii, 2011. "Preemption Games under Levy Uncertainty," Department of Economics Working Papers 131101, The University of Texas at Austin, Department of Economics, revised Oct 2014.
    18. Li, X. & Zuidwijk, R.A. & de Koster, M.B.M. & Dekker, R., 2016. "Competitive Capacity Investment under Uncertainty," ERIM Report Series Research in Management ERS-2016-005-LIS, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    19. Vedel, Suzanne Elizabeth & Thorsen, Bo Jellesmark & Jacobsen, Jette Bredahl, 2009. "First-movers, non-movers, and social gains from subsidising entry in markets for nature-based recreational goods," Ecological Economics, Elsevier, vol. 68(8-9), pages 2363-2371, June.
    20. Boyarchenko, Svetlana & Levendorskiĭ, Sergei, 2014. "Preemption games under Lévy uncertainty," Games and Economic Behavior, Elsevier, vol. 88(C), pages 354-380.
    21. Huberts, Nick, 2017. "Strategic investment in innovation : Capacity and timing decisions under uncertainty," Other publications TiSEM 6473e1df-9b8d-49ae-99f8-b, Tilburg University, School of Economics and Management.

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