Preemption Games: Theory and Experiment∗

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.

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Cite this paper

@inproceedings{Anderson2008PreemptionGT, title={Preemption Games: Theory and Experiment∗}, author={Steven T. Anderson and Daniel Friedman and Ryan Oprea and Nitai Farmer and A. A. Freidin and Adrianna Arai}, year={2008} }