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Irreversible Investment under Competition with a Markov Switching Regime

Author

Listed:
  • Makoto Goto

    (Graduate School of Economics and Business Administration, Hokkaido University)

  • Katsumasa Nishide

    (Department of Economics, Yokohama National University)

  • Ryuta Takashima

    (Faculty of Science and Technology, Tokyo University of Science)

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.

Suggested Citation

  • Makoto Goto & Katsumasa Nishide & Ryuta Takashima, 2013. "Irreversible Investment under Competition with a Markov Switching Regime," KIER Working Papers 861, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:861
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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP861.pdf
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    References listed on IDEAS

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    Cited by:

    1. Katsumasa Nishide & Kyoko Yagi, 2013. "Competition and the Bad News Principle in a Real Options Framework," KIER Working Papers 860, Kyoto University, Institute of Economic Research.

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    More about this item

    Keywords

    Real options; Competition; Timing game; Regime switch;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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