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American Economic Review: Vol. 100 No. 4 (September 2010)

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Preemption Games: Theory and Experiment

Article Citation

Anderson, Steven T., Daniel Friedman, and Ryan Oprea. 2010. "Preemption Games: Theory and Experiment." American Economic Review, 100(4): 1778-1803.

DOI: 10.1257/aer.100.4.1778

Abstract

Several impatient investors with private costs Ci face an indivisible irreversible investment opportunity whose value V is governed by geometric Brownian motion. The first investor i to seize the opportunity receives the entire payoff, V-Ci. We characterize the symmetric Bayesian Nash equilibrium for this game. A laboratory experiment confirms the model's main qualitative predictions: competition drastically lowers the value at which investment occurs; usually the lowest-cost investor preempts the other investors; observed investment patterns in competition (unlike monopoly) are quite insensitive to changes in the Brownian parameters. Support is more qualified for the prediction that markups decline with cost. (JEL C73, D44, D82, G31)

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Authors

Anderson, Steven T. (National Minerals Information Center, US Geological Survey, Reston, VA)
Friedman, Daniel (U CA, Santa Cruz)
Oprea, Ryan (U CA, Santa Cruz)

JEL Classifications

C73: Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
D44: Auctions
D82: Asymmetric and Private Information
G31: Capital Budgeting; Fixed Investment and Inventory Studies; Capacity


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