DP3013 Irreversible Investment with Strategic Interactions
|Author(s):||Robin Mason, Helen Weeds|
|Publication Date:||October 2001|
|Keyword(s):||network effects, pre-emption, real options|
|JEL(s):||C73, D81, L13, O31|
|Programme Areas:||Industrial Organization|
|Link to this Page:||www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3013|
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.