Competition and Irreversible Investments under Uncertainty

Michele Moretto

No 58, "Marco Fanno" Working Papers from Dipartimento di Scienze Economiche "Marco Fanno"

Abstract: We examine the effect of competition on investment decisions in an industry in which each firm has a completely irreversible investment opportunity and the product market has positive externalities for a small market size and negative externalities for a large market size. In the latter case, which corresponds to the traditional competitive industries, firms invest sequentially as market profitability develops. In the former case, which corresponds to industries in which investment is mutually beneficial, firms invest simultaneously after the market's profitability has developed sufficiently to gain all network benefits and to recover the option value of waiting. These extensions of a real options analysis may help explain rapid and sudden developments such as recent Internet investment, or explain the late take-off phenomenon of prolonged start-up problems, such as the case of fax machine production.

Keywords: Irreversible Investments; Real Options; Network Effects (search for similar items in EconPapers)
JEL-codes: C61 D81 G31 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2007-11
New Economics Papers: this item is included in nep-bec, nep-com, nep-mic and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Competition and irreversible investments under uncertainty (2008)
Working Paper: Competition and Irreversible Investments under Uncertainty (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:pad:wpaper:0058

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