Preemption Games: Theory and Experiment

44 Pages Posted: 13 Oct 2008

See all articles by Steven T. Anderson

Steven T. Anderson

affiliation not provided to SSRN

Daniel Friedman

University of California, Santa Cruz - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Ryan Oprea

University of California, Santa Cruz

Date Written: March 6, 2008

Abstract

Several investors face an irreversible investment opportunity whose value V is governed by Brownian motion with upward drift and random expiration. The first investor i to seize the opportunity before expiration receives the current V less a privately known cost Ci; the other investors receive nothing. We characterize Bayesian Nash Equilibrium (BNE) for this game, extending previously known results.

We also report a laboratory experiment with 72 subjects randomly matched into 600 triopolies. As predicted in BNE, subjects in triopolies invested at lower values than in monopolies, changes in Brownian parameters significantly altered investment values in monopoly but not in triopoly; and the lowest cost investor in a triopoly usually preempted the others. Evidence was mixed on other BNE predictions, e.g., whether higher cost brings smaller markups. Overall, subjects' earnings came rather close to the BNE prediction.

Keywords: Preemption, Incomplete Information, Irreversible Investment, Laboratory Experiment

JEL Classification: C73, C92, D82, G13

Suggested Citation

Anderson, Steven T. and Friedman, Daniel and Oprea, Ryan, Preemption Games: Theory and Experiment (March 6, 2008). Available at SSRN: https://ssrn.com/abstract=1282245 or http://dx.doi.org/10.2139/ssrn.1282245

Steven T. Anderson (Contact Author)

affiliation not provided to SSRN ( email )

Daniel Friedman

University of California, Santa Cruz - Department of Economics ( email )

Social Sciences I
Santa Cruz, CA 95064
United States
831-459-4981 (Phone)
831-459-5900 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Ryan Oprea

University of California, Santa Cruz ( email )

1156 High St
Santa Cruz, CA 95064
United States

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