Impact of Bayesian Learning and Externalities on Strategic Investment

H. Dharma Kwon (), Wenxin Xu (), Anupam Agrawal () and Suresh Muthulingam ()
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H. Dharma Kwon: Department of Business Administration, University of Illinois at Urbana–Champaign, Champaign, Illinois 61820
Wenxin Xu: Department of Business Administration, University of Illinois at Urbana–Champaign, Champaign, Illinois 61820
Anupam Agrawal: Mays Business School, Texas A&M University, College Station, Texas 77843
Suresh Muthulingam: Smeal College of Business, The Pennsylvania State University, University Park, Pennsylvania 16802

Management Science, 2016, vol. 62, issue 2, 550-570

Abstract: We investigate the interplay between learning effects and externalities in the problem of competitive investments with uncertain returns. We examine a game theoretic duopoly investment model in which (i) a firm can learn about the profitability of the investment by observing the performance of the first mover and (ii) externalities exist between the investments of two firms. We find a region of a war of attrition between the two firms in which the interplay between externalities and learning gives rise to counterintuitive effects on investment strategies and payoffs. In particular, we find that, contrary to the conventional war of attrition where an increase in benefits for the follower generally delays the first move, an increase in the rate of learning—which tends to benefit the follower—can hasten the first investment. This paper was accepted by James Smith, decision analysis.

Keywords: games; group decisions; stochastic; decision analysis; sequential; dynamic programming; optimal control (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:62:y:2016:i:2:p:550-570

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