Quick or Persistent? Strategic Investment Demanding Versatility

Jan-Henrik Steg () and Jacco Thijssen
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Jacco Thijssen: Center for Mathematical Economics, Bielefeld University

No 541, Center for Mathematical Economics Working Papers from Center for Mathematical Economics, Bielefeld University

Abstract: In this paper we analyse a dynamic model of investment under uncertainty in a duopoly, in which each firm has an option to switch from the present market to a new market. We construct a subgame perfect equilibrium in mixed strategies and show that both preemption and attrition can occur along typical equilibrium paths. In order to determine the attrition region a two-dimensional constrained optimal stopping problem needs to be solved, for which we characterize the non-trivial stopping boundary in the state space. We explicitly determine Markovian equilibrium stopping rates in the attrition region and show that there is always a positive probability of eventual preemption, contrasting the deterministic version of the model. A simulation-based numerical example illustrates the model and shows the relative likelihoods of investment taking place in attrition and preemption regions.

Keywords: two-dimensional optimal stopping.; Markovperfect equilibrium; real options; war of attrition; preemption; Stochastic timing games (search for similar items in EconPapers)
Pages: 35
Date: 2015-06-15
New Economics Papers: this item is included in nep-com and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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https://pub.uni-bielefeld.de/download/2757310/2757311 First Version, 2015 (application/pdf)

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Working Paper: Quick or Persistent? Strategic Investment Demanding Versatility (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:bie:wpaper:541

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