Rivalry under price and quantity competition

Helena Pinto, Dean Paxson

Research output: Contribution to journalArticle

24 Citations (Scopus)

Abstract

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).
Original languageEnglish
Pages (from-to)209-224
Number of pages15
JournalReview of Financial Economics
Volume14
Issue number3-4
DOIs
Publication statusPublished - 23 Jun 2005

Keywords

  • real options
  • pre-emption
  • stochastic processes
  • competitive games
  • rivalry

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