Irreversible Investment under Competition with a Markov Switching Regime

Makoto Goto (), Katsumasa Nishide and Ryuta Takashima ()
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Makoto Goto: Graduate School of Economics and Business Administration, Hokkaido University
Ryuta Takashima: Faculty of Science and Technology, Tokyo University of Science

No 861, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: In this paper, we study an investment problem in which two asymmetric firms face competition and the regime characterizing economic conditions follows Markov switching. We derive the value functions and investment thresholds of a leader and a follower. One of the interesting results is that in contrast to the case of no regime switching, even if the current market size is small, both advantaged and disadvantaged firms have an incentive to become a leader in some parameter settings.

Keywords: Real options; Competition; Timing game; Regime switch (search for similar items in EconPapers)
JEL-codes: C73 D43 D81 E32 (search for similar items in EconPapers)
Date: 2013-04
New Economics Papers: this item is included in nep-com
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Citations: View citations in EconPapers (1)

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