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A duopoly preemption game with two alternative stochastic investment choices

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Abstract

This paper studies a duopoly investment model with uncertainty. There are two alternative irreversible investments. The first firm to invest gets a monopoly benefit for a specified period of time. The second firm to invest gets information based on what happens with the first investor, as well as cost reduction benefits. We describe the payoff functions for both the leader and follower firm. Then, we present a stochastic control game where the firms can choose when to invest, and hence influence whether they become the leader or the follower. In order to solve this problem, we combine techniques from optimal stopping and game theory. For a specific choice of parametres, we show that no pure symmetric subgame perfect Nash equilibrium exists. However, an asymmetric equilibrium is characterized. In this equilibrium, two disjoint intervals of market demand level give rise to preemptive investment behavior of the firms, while the firms otherwise are more reluctant to be the first mover.

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  1. Department of Mathematics, University of Oslo, Pb. 1053 Blindern, 0316, Oslo, Norway

    Kristina Rognlien Dahl & Espen Stokkereit

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  1. Kristina Rognlien Dahl
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  2. Espen Stokkereit
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Correspondence to Kristina Rognlien Dahl.

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Dahl, K.R., Stokkereit, E. A duopoly preemption game with two alternative stochastic investment choices. Afr. Mat. 30, 663–680 (2019). https://doi.org/10.1007/s13370-019-00674-3

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  • DOI: https://doi.org/10.1007/s13370-019-00674-3

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