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Strategic investment under uncertainty : Why multi-option firms lose the preemption run

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  • Yu, Wencheng

    (Tilburg University, School of Economics and Management)

  • Wen, Xingang

    (Tilburg University, School of Economics and Management)

  • Huberts, Nick F. D.

    (Tilburg University, School of Economics and Management)

  • Kort, Peter M.

    (Tilburg University, School of Economics and Management)

Abstract

We consider a dynamic duopoly game where firms choose both the timing and size of their investments. The existing real options literature predominantly consists of contributions where firms have a single option to invest. This paper relaxes this assumption by giving Firm A multiple options to undertake further investments with the purpose to expand whereas Firm B only holds the option to enter the market. In this asymmetric setting we get the surprising result that, in equilibrium, Firm B invests first. If Firm A invests first, Firm A and Firm B keep on being involved in preemption games for subsequent investments until Firm B enters the market, which leads to inefficiently early investments of Firm A. When Firm B invests first, then only one preemption game is played, which leads to Firm A being free to choose its unrestricted optimal investment moments.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Yu, Wencheng & Wen, Xingang & Huberts, Nick F. D. & Kort, Peter M., 2024. "Strategic investment under uncertainty : Why multi-option firms lose the preemption run," Other publications TiSEM 41ac07cd-91cb-4f3c-9401-d, Tilburg University, School of Economics and Management.
    • Handle: RePEc:tiu:tiutis:41ac07cd-91cb-4f3c-9401-d9176e4c145c
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    References listed on IDEAS

    as
    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    2. Riedel, Frank & Steg, Jan-Henrik, 2017. "Subgame-perfect equilibria in stochastic timing games," Journal of Mathematical Economics, Elsevier, vol. 72(C), pages 36-50.
    3. Drew Fudenberg & Jean Tirole, 1985. "Preemption and Rent Equalization in the Adoption of New Technology," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(3), pages 383-401.
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    7. Boonman, H.J. & Hagspiel, V. & Kort, P.M., 2015. "Dedicated vs product flexible production technology: Strategic capacity investment choice," European Journal of Operational Research, Elsevier, vol. 244(1), pages 141-152.
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