How Risk Disciplines Pre-Commitment

Abstract

Cournot competition, Stackelberg, preemption, information value, market risk, C73, D43, D81, D83, L13,

A Competitive Duopoly where Information Spillovers can be Mutually Advantageous

“…[11] gives an example of an endogenous leadership in an investment game with an uncertainty on the profitability of the market. However, it is shown in [14] and in [3] that a sequential move is not likely to be an equilibrium in a simple two-period linear model with demand uncertainty. The reason is that, with quantity competition, the industrial surplus is usually higher when firms produce simultaneously rather than sequentially.…”

“…There is a discount factor such that the first best is to produce as late as possible. For simplicity's sake, profits are actualized at time 0, when the market clears, using an ex ante discount factor 3 . In order to make the commitments of firms credible, we assume that firms can only produce once 4 .…”

“…Thus, any type of investment game that presents those properties can fit our model. 3 Note that . For example, producing at time zero a quantity costs , whereas at a time before time 0, it costs when you actualize at time zero.…”

Quantity-setting games with a dominant firm

“…3 Thus, a kind of game-theoretic foundation of Forchheimer's dominant-firm model can be given by two-stage quantity-setting games. A similar result has been obtained by Sadanand and Sadanand (1996) in the presence of a sufficiently small but nonvanishing amount of demand uncertainty in a market with one large firm and a continuum of identical small firms.…”

“…Of course, his findings cannot support Forchheimer's model since because of the symmetric setting there is no firm with a clear cost advantage. 4 For a recent contribution on quantity-setting timing games with demand uncertainty see Caron and Lafay (2008).…”