Real Options, Preemption, and the Dynamics of Industry Investments

Marcel Boyer, Pierre Lasserre, Thomas Mariotti and Michel Moreaux

CIRANO Working Papers from CIRANO

Abstract: We study the development of a duopoly industry -evolution of firm capacities and competitive behavior- in a continuous-time real-options model of capacity investment. Our methodology allows the evaluation of investment options and exercise rules in a strategic setup. In the initial industry development phase, firms attempt to preempt each other, so that the first industry investment occurs earlier than socially optimal and the first entrant takes more risk than socially optimal. While capacity units are costly, indivisible, durable, and big relative to market size, early entry cannot secure a first-mover advantage, so that both firms are active beyond some level of market development. Once both firms hold capacity, tacit collusion, taking the form of postponed capacity investment, may occur in Markov Perfect Equilibrium. Volatility and the expected speed of market development play a crucial role in the determination of competitive behavior: we show that a tacit-collusion equilibrium is certain to exist when market growth is highly volatile and/or very fast. Nous étudions le développement d'une industrie -capacités et comportement concurrentiel- dans un modèle en temps continu d'options réelles d'investissement en capacité. Notre méthodologie permet l'évaluation des options et des règles d'exercice en contexte stratégique. Initialement, les firmes ont un comportement de préemption, si bien que le premier investissement en capacité se produit plus tôt, et comporte un risque plus élevé, que socialement désirable. Bien que les unités de capacité soient coûteuses, indivisibles, durables et de taille non négligeable par rapport au marché, l'entrée hâtive ne peut conférer d'avantage durable; à partir d'un certain niveau de développement du marché, les deux firmes sont en activité. Alors, une collusion tacite pour retarder les augmentations de capacité subséquentes peut devenir possible en équilibre Markovien parfait. La volatilité du marché et sa vitesse de croissance jouent ici un rôle crucial: l'équilibre de collusion tacite existe si la croissance est très volatile et/ou très rapide.

Keywords: Real options; Option value; Duopoly; Preemption; Collusion; Capacity; Industry growth; Volatility; Risk , Options réelles, Valeur d'option; Duopole; Préemption; Collusion; Capacité; Croissance du marché; Volatilité; Risque (search for similar items in EconPapers)
JEL-codes: C73 D43 D92 L13 (search for similar items in EconPapers)
Date: 2001-11-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Working Paper: Real Options, Preemption, and the Dynamics of Industry Investments (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:cir:cirwor:2001s-64

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