Investment in Oligopoly under Uncertainty

The Accordion Effect

Research output: Working paperDiscussion paperOther research output

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Abstract

In the strategic investment under uncertainty literature the trade off between the value of waiting known from single decision maker models and the incentive to preempt competitors is mainly studied in duopoly models.This paper aims at studying competitive investments in new markets where more than two (potential) competitors are present.In case of three firms an accordion effect in terms of investment thresholds is detected in the sense that an exogenous demand shock results in a change of the wedge between the investment thresholds of the first and second investors that is qualitatively different from the change of the wedge between the second and third investment threshold.This result extends to the n firm case.We show that a direct implication of the accordion effect is that there are two types of equilibria in the three firm case.In the first type all firms invest sequentially and in the second type the first two investors invest simultaneously and the third investor invests at a later moment.If we consider sequential equilibria and compare entry times of the first investors for different potential market sizes, it turns out that in the two firm case the first investor invests earlier than in the monopoly case, in the three firm case the investment timing lies in between the one and the two firm case, the four firm case lies in between the two and the three firm case, and so on and so forth.Hence, a policy maker interested in an early start up should hope for an even number of competitors, although for n large the investment times of the first investors are almost equal.
Original languageEnglish
Place of PublicationTilburg
PublisherOperations research
Number of pages39
Volume2006-69
Publication statusPublished - 2006

Publication series

NameCentER Discussion Paper
Volume2006-69

Fingerprint

Uncertainty
Investors
Oligopoly
Competitors
Sequential equilibrium
Demand shocks
Politicians
Monopoly
Decision maker
Investment timing
Investment under uncertainty
Trade-offs
Strategic investment
New markets
Incentives
Market size
Duopoly
Start-up

Keywords

  • investment
  • real options
  • oligopoly

Cite this

Bouis, R., Huisman, K. J. M., & Kort, P. M. (2006). Investment in Oligopoly under Uncertainty: The Accordion Effect. (CentER Discussion Paper; Vol. 2006-69). Tilburg: Operations research.
Bouis, R. ; Huisman, K.J.M. ; Kort, P.M. / Investment in Oligopoly under Uncertainty : The Accordion Effect. Tilburg : Operations research, 2006. (CentER Discussion Paper).
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Bouis, R, Huisman, KJM & Kort, PM 2006 'Investment in Oligopoly under Uncertainty: The Accordion Effect' CentER Discussion Paper, vol. 2006-69, Operations research, Tilburg.

Investment in Oligopoly under Uncertainty : The Accordion Effect. / Bouis, R.; Huisman, K.J.M.; Kort, P.M.

Tilburg : Operations research, 2006. (CentER Discussion Paper; Vol. 2006-69).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Investment in Oligopoly under Uncertainty

T2 - The Accordion Effect

AU - Bouis, R.

AU - Huisman, K.J.M.

AU - Kort, P.M.

N1 - Subsequently published in International Journal of Industrial Organizations, 2009 Pagination: 39

PY - 2006

Y1 - 2006

N2 - In the strategic investment under uncertainty literature the trade off between the value of waiting known from single decision maker models and the incentive to preempt competitors is mainly studied in duopoly models.This paper aims at studying competitive investments in new markets where more than two (potential) competitors are present.In case of three firms an accordion effect in terms of investment thresholds is detected in the sense that an exogenous demand shock results in a change of the wedge between the investment thresholds of the first and second investors that is qualitatively different from the change of the wedge between the second and third investment threshold.This result extends to the n firm case.We show that a direct implication of the accordion effect is that there are two types of equilibria in the three firm case.In the first type all firms invest sequentially and in the second type the first two investors invest simultaneously and the third investor invests at a later moment.If we consider sequential equilibria and compare entry times of the first investors for different potential market sizes, it turns out that in the two firm case the first investor invests earlier than in the monopoly case, in the three firm case the investment timing lies in between the one and the two firm case, the four firm case lies in between the two and the three firm case, and so on and so forth.Hence, a policy maker interested in an early start up should hope for an even number of competitors, although for n large the investment times of the first investors are almost equal.

AB - In the strategic investment under uncertainty literature the trade off between the value of waiting known from single decision maker models and the incentive to preempt competitors is mainly studied in duopoly models.This paper aims at studying competitive investments in new markets where more than two (potential) competitors are present.In case of three firms an accordion effect in terms of investment thresholds is detected in the sense that an exogenous demand shock results in a change of the wedge between the investment thresholds of the first and second investors that is qualitatively different from the change of the wedge between the second and third investment threshold.This result extends to the n firm case.We show that a direct implication of the accordion effect is that there are two types of equilibria in the three firm case.In the first type all firms invest sequentially and in the second type the first two investors invest simultaneously and the third investor invests at a later moment.If we consider sequential equilibria and compare entry times of the first investors for different potential market sizes, it turns out that in the two firm case the first investor invests earlier than in the monopoly case, in the three firm case the investment timing lies in between the one and the two firm case, the four firm case lies in between the two and the three firm case, and so on and so forth.Hence, a policy maker interested in an early start up should hope for an even number of competitors, although for n large the investment times of the first investors are almost equal.

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KW - real options

KW - oligopoly

M3 - Discussion paper

VL - 2006-69

T3 - CentER Discussion Paper

BT - Investment in Oligopoly under Uncertainty

PB - Operations research

CY - Tilburg

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Bouis R, Huisman KJM, Kort PM. Investment in Oligopoly under Uncertainty: The Accordion Effect. Tilburg: Operations research. 2006. (CentER Discussion Paper).