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Investment strategies of duopoly firms with asymmetric time-to-build under a jump-diffusion model

Author

Listed:
  • Yanyun Liu

    (Harbin Institute of Technology)

  • Baiqing Sun

    (Harbin Institute of Technology)

Abstract

This paper employs a two-factor jump-diffusion model to investigate the optimal investment timing and capacity choice of the duopoly firms in the presence of uncertain and asymmetric time-to-build. By assuming that both the market demand and investment cost follow the jump-diffusion process, we show that the impacts of uncertainty of time-to-build on duopoly firms’ the optimal investment decisions depend on the directions of jumps in demand and investment cost. Moreover, the asymmetry of time-to-build makes it possible for the dominated firm to preempt the market successfully and becomes the leader. The leader’s capacity level increases with the dominated firm’s time-to-build and the follower’s decreases, even if the dominated firm is the leader. We also apply numerical simulation to compare the main results between two-factor diffusion model and two-factor jump-diffusion model.

Suggested Citation

  • Yanyun Liu & Baiqing Sun, 2023. "Investment strategies of duopoly firms with asymmetric time-to-build under a jump-diffusion model," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 98(3), pages 377-410, December.
    • Handle: RePEc:spr:mathme:v:98:y:2023:i:3:d:10.1007_s00186-023-00833-0
    DOI: 10.1007/s00186-023-00833-0
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