Abstract
This paper examines exercise policies for closure options in a duopoly with uncertain (inverse) demand and strong strategic externalities. First, we consider a symmetric duopoly and contrast the resulting equilibrium exercise policies with the disinvestment behavior of a monopoly and of myopic firms. Second, the equilibria of the asymmetric duopoly model are derived and it is shown that the level of the demand uncertainty may affect the number of prevailing equilibria. Finally, the two main results that (a) duopolists disinvest later than a monopolist and earlier than myopic firms and that (b) an increase in market price volatility makes strategic externalities less important are discussed and related to the existing literature.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Dixit, A. K. and Pindyck, R. C. (1994): Investment Under Uncertainty, Princeton University Press. Princeton, New Jersey.
Fine, C. H. and Li, L. (1989): Equilibrium Exit in Stochastically Declining Industries. In: Games and Economic Behavior 1, 40–59.
Fudenberg, D. and Tirole, J. (1985): Preemption and Rent Equalization in the Adoption of New Technology. In: Review of Economic Studies 52, 383–401.
Fudenberg, D. and Tirole, J. (1986): A Theory of Exit in Duopoly. In: Econometrica 54, 943–960.
Fudenberg, D. and Tirole, J. (1991): Game Theory. MIT Press, Cambridge, MA.
Ghemawat, P. and Nalebuff, B. (1985): Exit. In: RAND Journal of Economics 16, 184–194.
Ghemawat, P. and Nalebuff, B. (1990): The Devolution of Declining Industries. In: Quarterly Journal of Economics 105, 167–186.
Grenadier, S. R. (1996): The Strategic Exercise of Options: Development Cascades and Overbuilding in Real Estate Markets. In: Journal of Finance 51, 1653–1679.
Hendricks, K., Weiss, A. and Wilson, C. (1988): The War of Attrition in Continuous Time with Complete Information. In: International Economic Review 29, 663–680.
Hoppe, H. C. (2000): Second-mover Advantages in the Strategic Adoption of New Technology under Uncertainty. In: International Journal of Industrial Organization 18, 315–338.
Huisman, K. J. M. (2000): Technology Investment: A Game Theoretic Real Options Approach, Kluwer Academic Publishers. Dordrecht.
Huisman, K. J. M. and Kort, P. M. (1999): Effects of Strategic Interactions on the Option Value of Waiting. Working Paper, CentER, Tilburg University.
Joaquin, D. C. and Butler, K. C. (1999): Competitive Investment Decisions — A Synthesis. In: Brennan, M. J. and Trigeorgis, L., eds. Project Flexibility, Agency, and Competition: New Developments in the Theory of Real Options. Oxford University Press, New York.
Khadem, V. and Perraudin, W. (2001): Default Hazards and the Term Structure of Credit Spreads in a Duopoly. Working Paper, Birkbeck College.
Lambrecht, B. M. (2001): The Impact of Debt Financing on Entry and Exit in a Duopoly. In: Review of Financial Studies 14, 765–804.
Mikosch, T. (1998): Elementary Stochastic Calculus — with Finance in View. World Scientific, Singapore.
Murto, P. (2004): Exit in Duopoly Under Uncertainty. Forthcoming in RAND Journal of Economics.
Pitchik, C. (1981): Equilibria of a Two-Person Non-Zerosum Noisy Game of Timing. In: Int. Journal of Game Theory 10, 207–221.
Smets, F. (1991): Exporting versus FDI: The Effect of Uncertainty, Irreversibilities and Strategic Interactions. Working Paper, Yale University.
Sparla, T. (2001): Strategic Real Options — with the German Electric Power Market in View. Dissertation, University of Dortmund. (See http://eldorado.uni-dortmund.de:8080/FB11/ls1/forschung/ 2001/Sparla).
Thijssen, J. J. J., Huisman, K. J. M. and Kort, P. M. (2002): Strategic Investment under Uncertainty and Information Spillovers. Working Paper, CentER, Tilburg University.
Weeds, H. (2002): Strategic Delay in a Real Options Model of RandD Competition. In: Review of Economic Studies 69, 383–402.
Editor information
Rights and permissions
Copyright information
© 2004 Springer Fachmedien Wiesbaden
About this chapter
Cite this chapter
Sparla, T. (2004). Closure Options in a Duopoly with Strong Strategic Externalities. In: Dangl, T., Kopel, M., Kürsten, W. (eds) Real Options. ZfB-Ergänzungshefte. Gabler Verlag, Wiesbaden. https://doi.org/10.1007/978-3-663-12338-5_5
Download citation
DOI: https://doi.org/10.1007/978-3-663-12338-5_5
Publisher Name: Gabler Verlag, Wiesbaden
Print ISBN: 978-3-409-03443-2
Online ISBN: 978-3-663-12338-5
eBook Packages: Springer Book Archive