Preemption Games Under Levy Uncertainty

41 Pages Posted: 23 Oct 2014

See all articles by Svetlana Boyarchenko

Svetlana Boyarchenko

University of Texas at Austin - Department of Economics

Sergei Levendorskii

Calico Science Consulting

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Date Written: September 22, 2014

Abstract

We study a stochastic version of Fudenberg -- Tirole's preemption game. Two firms contemplate entering a new market with stochastic demand. Firms differ in sunk costs of entry. If the demand process has no upward jumps, the low cost firm enters first, and the high cost firm follows. If leader's optimization problem has an interior solution, the leader enters at the optimal threshold of a monopolist; otherwise, the leader enters earlier than the monopolist. If the demand admits positive jumps, then the optimal entry threshold of the leader can be lower than the monopolist's threshold even if the solution is interior; simultaneous entry can happen either as an equilibrium or a coordination failure; the high cost firm can become the leader. We characterize subgame perfect equilibrium strategies in terms of stopping times and value functions. Analytical expressions for the value functions and thresholds that define stopping times are derived.

Keywords: stopping time games, preemption, Levy uncertainty

JEL Classification: C73, C61, D81

Suggested Citation

Boyarchenko, Svetlana I. and Levendorskii, Sergei Z., Preemption Games Under Levy Uncertainty (September 22, 2014). Games and Economic Behavior, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2513288

Svetlana I. Boyarchenko (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

Sergei Z. Levendorskii

Calico Science Consulting ( email )

Austin, TX
United States

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