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Discussion Paper Details

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Title: Irreversible Investment with Strategic Interactions

Author(s): Robin Mason and Helen Weeds

Publication Date: October 2001

Keyword(s): network effects, pre-emption and real options

Programme Area(s): Industrial Organization

Abstract: This Paper examines irreversible investment in a project with uncertain returns, when there is an advantage to being the first to invest, and externalities to investing when others also do so. Pre-emption decreases and may even eliminate the option values created by irreversibility and uncertainty. Externalities introduce inefficiencies in investment decisions. Pre-emption and externalities combined can actually hasten, rather than delay, investment, contrary to the usual outcome. These facts demonstrate the importance of extending ?real options? analysis to include strategic interactions.

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Bibliographic Reference

Mason, R and Weeds, H. 2001. 'Irreversible Investment with Strategic Interactions'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3013