Strategic Irreversible Investment

Jan-Henrik Steg
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Jan-Henrik Steg: Center for Mathematical Economics, Bielefeld University

No 741, Center for Mathematical Economics Working Papers from Center for Mathematical Economics, Bielefeld University

Abstract: This paper studies oligopolistic irreversible investment with closed-loop strategies. These permit fully dynamic interactions that result in much richer strategic behavior than previous studies with open-loop strategies allow. The tradeoff between preemption incentives and the option value of waiting becomes distinctly visible. Strategies that depend on present capital stocks enable credible reactions that deter from excessive preemption and support positive option values in equilibrium. Simpler strategies lead into a “preemption trap” with perfectly competitive outcome and zero net present values. To obtain these results, a novel concept of Markov perfect equilibrium is developed that copes with optimal investment taking the form of singular control.

Keywords: Irreversible investment; Oligopoly; Markov perfect equilibrium; Singular control (search for similar items in EconPapers)
Pages: 32
Date: 2025-08-18
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Persistent link: https://EconPapers.repec.org/RePEc:bie:wpaper:741

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