Investment decisions in finite-lived monopolies

Paulo J. Pereira and Artur Rodrigues

Journal of Economic Dynamics and Control, 2014, vol. 46, issue C, 219-236

Abstract: This paper studies the value and optimal timing for investment in finite-lived monopolies, extending the literature on real option games by considering the cases of random and certain-lived monopolies. Under these settings, firms face the risk of demonopolization, that can occur as a random or a certain event. We show that these new settings produce significantly different results when compared to the canonical monopolistic and duopolistic models. In a certain-lived monopoly, the leader invests sooner than in a duopoly if there is a risk of being preempted, and later than in a monopoly if the leader role is pre-assigned. In a random-lived monopoly, entry occurs somewhere between the duopoly and monopoly cases. Higher uncertainty delays investment in all cases.

Keywords: C73; D43; D81; D92; G31; G38; Finite-lived monopolies; Real option games; Uncertainty; Real Options (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:46:y:2014:i:c:p:219-236

DOI: 10.1016/j.jedc.2014.07.003

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