American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Preemption Games: Theory and Experiment
American Economic Review
vol. 100,
no. 4, September 2010
(pp. 1778–1803)
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)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.100.4.1778Additional Materials
JEL Classification
- 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