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Real Options, Preemption, and the Dynamics of Industry Investments

We study the development of a duopoly industry -evolution of firm capacities and competitive behavior- in a continuous-time real-options model of capacity investment. Our methodology allows the evaluation of investment options and exercise rules in a strategic setup. In the initial industry development phase, firms attempt to preempt each other, so that the first industry investment occurs earlier than socially optimal and the first entrant takes more risk than socially optimal. While capacity units are costly, indivisible, durable, and big relative to market size, early entry cannot secure a first-mover advantage, so that both firms are active beyond some level of market development. Once both firms hold capacity, tacit collusion, taking the form of postponed capacity investment, may occur in Markov Perfect Equilibrium. Volatility and the expected speed of market development play a crucial role in the determination of competitive behavior: we show that a tacit-collusion equilibrium is certain to exist when market growth is highly volatile and/or very fast. Nous etudions le developpement d'une industrie -capacites et comportement concurrentiel- dans un modele en temps continu d'options reelles d'investissement en capacite. Notre methodologie permet l'evaluation des options et des regles d'exercice en contexte strategique. Initialement, les firmes ont un comportement de preemption, si bien que le premier investissement en capacite se produit plus tot, et comporte un risque plus eleve, que socialement desirable. Bien que les unites de capacite soient couteuses, indivisibles, durables et de taille non negligeable par rapport au marche, l'entree hâtive ne peut conferer d'avantage durable; a partir d'un certain niveau de developpement du marche, les deux firmes sont en activite. Alors, une collusion tacite pour retarder les augmentations de capacite subsequentes peut devenir possible en equilibre Markovien parfait. La volatilite du marche et sa vitesse de croissance jouent ici un role crucial: l'equilibre de collusion tacite existe si la croissance est tres volatile et/ou tres rapide.