Preemption Games: Theory and Experiment

Several investors face an irreversible investment opportunity whose value V is governed by Brownian motion with upward drift and random expiration. The �rst investor i to seize the opportunity before expiration receives the current V less a privately known cost Ci; the other investors receive nothing. We characterize Bayesian Nash Equilibrium (BNE) for this game, extending previously known results. We also report a laboratory experiment with 72 subjects randomly matched into 600 tri- opolies. As predicted in BNE, subjects in triopolies invested at lower values than in monopolies, changes in Brownian parameters signi�cantly altered investment values in monopoly but not in triopoly; and the lowest cost investor in a triopoly usually preempted the others. Evidence was mixed on other BNE predictions, e.g., whether higher cost brings smaller markups. Overall, subjects' earnings came rather close to the BNE prediction.