Preemptive competition between two firms with different discount rates

Michi Nishihara ()
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Michi Nishihara: Graduate School of Economics, Osaka University

No 20-04, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This paper studies a real options duopoly game between two firms with different time discount rates. I derive the order of investments, investment thresholds, and firm values in equilibrium. With no cost disadvantage, the patient firm enters the market earlier and gains more value than does the impatient opponent. When the patient firm has a cost disadvantage, the order of market entry can depend on the market characteristics. With a weaker first-mover advantage, higher market volatility, and lower market growth rate, the impatient firm is more likely to be the first mover. Notably, the patient firm can earn more than the impatient firm, even though the patient firm enters the market later. These results are consistent with empirical findings on market entry timing.

Keywords: real options; timediscounting; marketentrytiming; preemption (search for similar items in EconPapers)
JEL-codes: C73 G31 L13 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2020-02
New Economics Papers: this item is included in nep-com
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