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The Effects of Information on Strategic Investment and Welfare

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

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.

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File URL: http://www.tcd.ie/Economics/TEP/2003_papers/tepno10JT23.PDF
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Paper provided by Trinity College Dublin, Department of Economics in its series Trinity Economics Papers with number 200310.

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Date of creation: 2003
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Handle: RePEc:tcd:tcduee:200310
Contact details of provider: Postal: Trinity College, Dublin 2
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Web page: http://www.tcd.ie/Economics/

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  1. Marcel Boyer & Pierre Lasserre & Michel Moreaux, 2007. "The Dynamics of Industry Investments," CIRANO Working Papers 2007s-09, CIRANO.
  2. Jensen, Richard, 1992. "Innovation Adoption and Welfare under Uncertainty," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 173-80, June.
  3. 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.
  4. Marcel Boyer & Pierre Lasserre & Thomas Mariotti & Michel Moreaux, 2001. "Real Options, Preemption, and the Dynamics of Industry Investments," Cahiers de recherche du Département des sciences économiques, UQAM 20-10, Université du Québec à Montréal, Département des sciences économiques.
  5. 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.
  6. Thijssen, Jacco J.J. & Huisman, Kuno J.M. & Kort, Peter M., 2012. "Symmetric equilibrium strategies in game theoretic real option models," Journal of Mathematical Economics, Elsevier, vol. 48(4), pages 219-225.
  7. Jensen, Richard, 1982. "Adoption and diffusion of an innovation of uncertain profitability," Journal of Economic Theory, Elsevier, vol. 27(1), pages 182-193, June.
  8. Dixit, Avinash, 1979. "The Role of Investment in Entry-Deterrence," The Warwick Economics Research Paper Series (TWERPS) 140, University of Warwick, Department of Economics.
  9. Hoppe, Heidrun C., 2000. "Second-mover advantages in the strategic adoption of new technology under uncertainty," International Journal of Industrial Organization, Elsevier, vol. 18(2), pages 315-338, February.
  10. Thijssen, J.J.J. & Huisman, K.J.M. & Kort, P.M., 2004. "The effect of information streams on capital budgeting decisions," Other publications TiSEM 20233f1a-abbd-40cf-a2df-1, Tilburg University, School of Economics and Management.
  11. Alvarez, Luis H. R. & Stenbacka, Rune, 2001. "Adoption of uncertain multi-stage technology projects: a real options approach," Journal of Mathematical Economics, Elsevier, vol. 35(1), pages 71-97, February.
  12. Hendricks, Ken & Weiss, Andrew & Wilson, Charles A, 1988. "The War of Attrition in Continuous Time with Complete Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(4), pages 663-80, November.
  13. repec:ner:tilbur:urn:nbn:nl:ui:12-84087 is not listed on IDEAS
  14. Bart Lambrecht & William Perraudin, 1996. "Real Options and Preemption," Archive Working Papers 026, Birkbeck, Department of Economics, Mathematics & Statistics.
  15. repec:dgr:kubcen:200281 is not listed on IDEAS
  16. Jensen, Richard, 1992. "Dynamic patent licensing," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 349-368, September.
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