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Preemptive investment under uncertainty

Jan-Henrik Steg ()

Games and Economic Behavior, 2018, vol. 110, issue C, 90-119

Abstract: This paper provides a general characterization of subgame-perfect equilibria for strategic timing problems, where two firms have the (real) option to make an irreversible investment. Profit streams are uncertain and depend on the market structure. The analysis is based directly on the inherent economic structure of the model. In particular, determining equilibria with preemptive investment is reduced to solving a single class of constrained optimal stopping problems. Further tools are derived for analyzing Markovian state-space models. Applications to typical models from the literature complete commonly insufficient equilibrium arguments, show when uncertainty leads to qualitatively different behavior, and establish additional equilibria that are Pareto improvements.

Keywords: Preemption; Real options; Irreversible investment; Subgame-perfect equilibrium; Optimal stopping (search for similar items in EconPapers)
JEL-codes: C61 C73 D21 D43 L12 L13 (search for similar items in EconPapers)
Date: 2018
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Related works:
Working Paper: Preemptive Investment under Uncertainty (2016) Downloads
Working Paper: Preemptive Investment under Uncertainty (2015) Downloads
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