Preemption games under Lévy uncertainty

Svetlana Boyarchenko and Sergei Levendorskiĭ

Games and Economic Behavior, 2014, vol. 88, issue C, 354-380

Abstract: We study a stochastic version of Fudenberg–Tirole's preemption game. Two firms contemplate entering a new market with stochastic demand. Firms differ in sunk costs of entry. If the demand process has no upward jumps, the low cost firm enters first, and the high cost firm follows. If leader's optimization problem has an interior solution, the leader enters at the optimal threshold of a monopolist; otherwise, the leader enters earlier than the monopolist. If the demand admits positive jumps, then the optimal entry threshold of the leader can be lower than the monopolist's threshold even if the solution is interior; simultaneous entry can happen either as an equilibrium or a coordination failure; the high cost firm can become the leader. We characterize subgame perfect equilibrium strategies in terms of stopping times and value functions. Analytical expressions for the value functions and thresholds that define stopping times are derived.

Keywords: Stopping time games; Preemption; Lévy uncertainty (search for similar items in EconPapers)
JEL-codes: C61 C73 D81 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (7)

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Working Paper: Preemption Games under Levy Uncertainty (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:88:y:2014:i:c:p:354-380

DOI: 10.1016/j.geb.2014.10.010

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