Multiequilibrium Game of Timing and Competition of Gas Pipeline Projects

G. Klaassen, A. V. Kryazhimskii and A. M. Tarasyev
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G. Klaassen: International Institute for Applied Systems Analysis
A. V. Kryazhimskii: Steklov Mathematical Institute
A. M. Tarasyev: International Institute for Applied Systems Analysis

Journal of Optimization Theory and Applications, 2004, vol. 120, issue 1, No 8, 147-179

Abstract: Abstract The paper addresses the issue of the optimal investments in innovations with strong long-term aftereffects. As an example, investments in the construction of gas pipelines are considered. The most sensitive part of an investment project is the choice of the commercialization time (stopping time), i.e., the time of finalizing the construction of the pipeline. If several projects compete on the market, the choices of the commercialization times determine the future structure of the market and thus become especially important. Rational decisions in this respect can be associated with Nash equilibria in a game between the projects. In this game, the total benefits gained during the pipelines life periods act as payoffs and the commercialization times as strategies. The goal of this paper is to characterize multiequilibria in the game of timing. The case of two players is studied in detail. A key point in the analysis is the observation that, for all players, the best response commercialization times concentrate at two instants that are fixed in advance. This reduces decisionmaking to choosing between two fixed investment policies (fast and slow) with the prescribed commercialization times. A description of a simple algorithm that finds all the Nash equilibria composed of fast and slow scenarios concludes the paper.

Keywords: Optimal stopping problem; game of timing; multiequilibria; best reply curves; econometric estimation (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1023/B:JOTA.0000012737.20285.33

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