Irreversible Investment with Strategic Interactions

40 Pages Posted: 6 Nov 2001

See all articles by Robin A. Mason

Robin A. Mason

University of Southampton - Division of Economics; Centre for Economic Policy Research (CEPR)

Helen Weeds

affiliation not provided to SSRN

Date Written: October 2001

Abstract

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.

Keywords: Real options, network effects, pre-emption

JEL Classification: C73, D81, L13, O31

Suggested Citation

Mason, Robin and Weeds, Helen F., Irreversible Investment with Strategic Interactions (October 2001). CEPR Discussion Paper No. 3013. Available at SSRN: https://ssrn.com/abstract=289565

Robin Mason (Contact Author)

University of Southampton - Division of Economics ( email )

Southampton, SO17 1BJ
United Kingdom
+44 23 8059 3268 (Phone)
+44 23 8059 3858 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Helen F. Weeds

affiliation not provided to SSRN

Register to save articles to
your library

Register

Paper statistics

Downloads
28
Abstract Views
1,551
PlumX Metrics