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Rivalry under price and quantity uncertainty
Author(s) -
Paxson Dean,
Pinto Helena
Publication year - 2005
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2005.04.002
Subject(s) - duopoly , economics , rivalry , microeconomics , monopoly , profit (economics) , value (mathematics) , econometrics , cournot competition , computer science , machine learning
We present a real option model for a duopoly setting where there are two stochastic factors and where the roles of the players are defined both exogenously and endogenously. The two stochastic factors are the number of units (market volume) and the profit per unit, which may have significantly different drifts and volatilities, and different correlations, depending on market structure and (dis)economies of scale. The paper shows that the degree of correlation between unit profits and market volume might result in different value functions and triggers, especially for followers and simultaneous investors in non‐pre‐emptive games. Monopoly‐like volume is a critical determinant of the leader's trigger in both pre‐emptive and non‐pre‐emptive games. First‐mover advantages are significant in the definition of the leader's optimal entry moment, if the players are fighting for the leader's position (pre‐emptive game).