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Preemption Games: Theory and Experiment

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  • Steven T. Anderson
  • Daniel Friedman
  • Ryan Oprea

Abstract

Several impatient investors with private costs C i face an indivisible irreversible investment opportunity whose value V is governed by geometric Brownian motion. The first investor i to seize the opportunity receives the entire payoff, V-C i . We characterize the symmetric Bayesian Nash equilibrium for this game. A laboratory experiment confirms the model's main qualitative predictions: competition drastically lowers the value at which investment occurs; usually the lowest-cost investor preempts the other investors; observed investment patterns in competition (unlike monopoly) are quite insensitive to changes in the Brownian parameters. Support is more qualified for the prediction that markups decline with cost. (JEL C73, D44, D82, G31)

Suggested Citation

  • Steven T. Anderson & Daniel Friedman & Ryan Oprea, 2010. "Preemption Games: Theory and Experiment," American Economic Review, American Economic Association, vol. 100(4), pages 1778-1803, September.
    • Handle: RePEc:aea:aecrev:v:100:y:2010:i:4:p:1778-1803
    Note: DOI: 10.1257/aer.100.4.1778
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    References listed on IDEAS

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    1. Ryan Oprea & Daniel Friedman & Steven T. Anderson, 2009. "Learning to Wait: A Laboratory Investigation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 76(3), pages 1103-1124.
    2. Dufwenberg, Martin & Gneezy, Uri, 2000. "Price competition and market concentration: an experimental study," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 7-22, January.
    3. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    4. Huck, Steffen & Normann, Hans-Theo & Oechssler, Jorg, 2004. "Two are few and four are many: number effects in experimental oligopolies," Journal of Economic Behavior & Organization, Elsevier, vol. 53(4), pages 435-446, April.
    5. Levin, Dan & Peck, James, 2003. "To Grab for the Market or to Bide One's Time: A Dynamic Model of Entry," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 536-556, Autumn.
    6. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    7. Andreas Park & Lones Smith, 2004. "Caller Number Five: Timing Games that Morph From One Form to Another," 2004 Meeting Papers 871, Society for Economic Dynamics.
    8. Lambrecht, Bart & Perraudin, William, 2003. "Real options and preemption under incomplete information," Journal of Economic Dynamics and Control, Elsevier, vol. 27(4), pages 619-643, February.
    9. Timothy Cason & Daniel Friedman, 1999. "Learning in a Laboratory Market with Random Supply and Demand," Experimental Economics, Springer;Economic Science Association, vol. 2(1), pages 77-98, August.
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    Cited by:

    1. Morreale, Azzurra & Mittone, Luigi & Lo Nigro, Giovanna, 2019. "Risky choices in strategic environments: An experimental investigation of a real options game," European Journal of Operational Research, Elsevier, vol. 279(1), pages 143-158.
    2. Zhu, Lei & Li, Li & Su, Bin, 2021. "The price-bidding strategy for investors in a renewable auction: An option games–based study," Energy Economics, Elsevier, vol. 100(C).
    3. Azevedo, Alcino & Paxson, Dean, 2014. "Developing real option game models," European Journal of Operational Research, Elsevier, vol. 237(3), pages 909-920.
    4. Catherine Bobtcheff & Jérôme Bolte & Thomas Mariotti, 2017. "Researcher’s Dilemma," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(3), pages 969-1014.
    5. Ayse Gül Mermer & Sander Onderstal & Joep Sonnemans, "undated". "Can Communication Mitigate Strategic Delays in Investment Timing?," Tinbergen Institute Discussion Papers 23-033/I, Tinbergen Institute.
    6. Bosch-Rosa, Ciril, 2018. "That's how we roll: An experiment on rollover risk," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 495-510.
    7. Stanton Hudja & Daniel Woods, 2024. "Exploration versus exploitation: A laboratory test of the single‐agent exponential bandit model," Economic Inquiry, Western Economic Association International, vol. 62(1), pages 267-286, January.
    8. repec:sus:susewp:0623 is not listed on IDEAS
    9. Azzurra Morreale & Luigi Mittone & Thi-Thanh-Tam Vu & Mikael Collan, 2020. "To Wait or Not to Wait? Use of the Flexibility to Postpone Investment Decisions in Theory and in Practice," Sustainability, MDPI, vol. 12(8), pages 1-19, April.
    10. Sanjay Banerjee & Michael Maier, 2016. "Public Information Precision and Coordination Failure: An Experiment," Journal of Accounting Research, Wiley Blackwell, vol. 54(4), pages 941-986, September.

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    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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