In this paper we develop a stochastic dynamic model of predatory pricing. When profits evolve sto... more In this paper we develop a stochastic dynamic model of predatory pricing. When profits evolve stochastically, a negative demand shock can lead to bankruptcy for firms, which cannot immediately raise external capital. An assumption that firms are able to hoard liquidity creates incentives for market incumbents to use the predatory pricing strategies in order to keep the new players out of the industry. Applying game theoretic and dynamic programming techniques, we show that an incumbent firm may use a large cash reserve as a war chest to initiate a price war that could drive the entrant out of the market. Because of uncertainty the entrant may wish to take a chance and enter based on the probability of success. Therefore, realised market structure may be different for different sample paths of the stochastic process.
We present a new approach for the empirical investigation of agglomeration patterns. We examine t... more We present a new approach for the empirical investigation of agglomeration patterns. We examine the clustering of manufacturing firms by identifying patterns of spatial network formation that deviate from randomly generated networks. Using firm-level panel data from Vietnam we calculate transitivity, a measure to determine the strength of clustering of manufacturing firms. We then test whether the observed clustering of firms is greater than that of a randomly generated network. Our findings suggest that the extent of clustering is over and above that which can be attributed to the legal and regulatory framework, economic zoning, or population patterns.
As becomes apparent from the standard text books in industrial organization (cf. Tirole, 1988, Th... more As becomes apparent from the standard text books in industrial organization (cf. Tirole, 1988, The Theory of Industrial Organization), the analysis of the effects of uncertainty within this field is yet underdeveloped. This paper shows that the new theory of strategic real options can be used to fill this gap. Based on the work by Smets (1991) standard models are identified, and they are analyzed by applying a method involving symmetric mixed strategies. As an illustration, extensions regarding asymmetry, technology adoption and decreasing uncertainty over time are reviewed. Among others, it is found that the value of a high cost firm can increase in its own cost. Furthermore, it is established to what extent investments are delayed when technological progress is anticipated, and it is found that competition can be bad for welfare.
In this paper we analyse a dynamic model of investment under uncertainty in a duopoly, in which e... more In this paper we analyse a dynamic model of investment under uncertainty in a duopoly, in which each firm has an option to switch from the present market to a new market. We construct a subgame perfect equilibrium in mixed strategies and show that both preemption and attrition can occur along typical equilibrium paths. In order to determine the attrition region a two-dimensional constrained optimal stopping problem needs to be solved, for which we characterize the non-trivial stopping boundary in the state space. We explicitly determine Markovian equilibrium stopping rates in the attrition region and show that there is always a positive probability of eventual preemption, contrasting the deterministic version of the model. A simulation-based numerical example illustrates the model and shows the relative likelihoods of investment taking place in attrition and preemption regions.
As becomes apparent from the standard text books in industrial organization (cf. Tirole, 1988, Th... more As becomes apparent from the standard text books in industrial organization (cf. Tirole, 1988, The Theory of Industrial Organization), the analysis of the effects of uncertainty within this field is yet underdeveloped. This paper shows that the new theory of strategic real options can be used to fill this "empty hole". Based on the work by Smets (1991) standard models are identified, and they are analyzed by applying a method involving symmetric mixed strategies. As an illustration, extensions regarding asymmetry, technology adoption and decreasing uncertainty over time are reviewed. Among others, it is found that the value of a high cost firm can increase in its own cost. Furthermore, it is established to what extent investments are delayed when technologial progress is anticipated, and it is found that competition can be bad for welfare.
This paper analyses the accuracy of replicating portfolio methods in predicting asset prices. In ... more This paper analyses the accuracy of replicating portfolio methods in predicting asset prices. In a two-period, general equilibrium model with incomplete financial markets and heterogeneous agents, a computational study is conducted under various distributional assumptions. We focus on the price of a call option on an underlying risky asset. There is evidence that the value of the (approximate) replicating portfolio is a good approximation for the general equilibrium price for CRRA preferences, but not for CARA preferences. Furthermore, there is strong evidence that the introduction of the call option reduces market incompleteness and that the price of the underlying asset is unchanged. There is, however, inconclusive evidence on whether the availability of the option increases agents' welfare.
It is often argued that compared to a carbon tax, a volatile carbon price under an emissions trad... more It is often argued that compared to a carbon tax, a volatile carbon price under an emissions trading system poses a problem in the transition towards a low carbon economy. However, this paper shows that, when sufficiently positively correlated with the electricity price, carbon price uncertainty diminishes overall volatility because of a diversification effect. To get this result, we develop a dynamic real options model to analyze the impact of positively correlated price uncertainty on the timing of an investment decision. In contrast to static models, we show that even when the carbon price is initially the same under both policy instruments, the timing of the investment decision will typically be different. More importantly, we find that multiple correlated price uncertainties under an emissions trading system encourages investment more than less uncertainty under a carbon tax. Hence, to stimulate a low carbon (or discourage a carbon intensive) investment, an emissions trading system (carbon tax) is preferred. The policy reverts for higher levels of uncertainty and low correlations.
This paper analyses a real options model of mergers and takeovers between two firms experiencing ... more This paper analyses a real options model of mergers and takeovers between two firms experiencing different, but correlated, uncertainty. It is assumed that mergers do not just lead to efficiency gains, but are also an act of diversification. Due to the latter assumption the region where a merger is optimal is a bounded interval and not a half-space as in most real options models. It is shown that if the roles of the bidder and the target are determined endogenously the option value of the mergers vanishes completely, implying that, in equilibrium, the mergers occur sooner than when these roles are exogenously given. It is also shown that mergers can be optimal even if synergies are negative.
Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch ge... more Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence.
We introduce a model to sequentially analyse both clinical trials and cost effectiveness of a new... more We introduce a model to sequentially analyse both clinical trials and cost effectiveness of a new health technology. This provides a consistent decision-making framework for evaluating (i) evidence from clinical trials, (ii) the expected value of further trials, (iii) the costs and benefits of adoption/abandonment. We derive the optimal decision rule by appropriately extending the Bayesian framework of sequential hypothesis testing. We find that increased noise in the trial observations lowers the value of the new technology, but leads to decisions, in expectation, being taken faster. The expected total discounted costs of the trial are non-monotonic in the incremental trial costs. The proposed method numerically outperforms a frequentist approach in terms of total value, and expected trial duration and costs. Delays in trial observations can have big qualitative effects on value. The model is illustrated using data on standard versus robot-assisted laporascopic prostatectomy.
In this paper we propose a solution to the Bayesian problem of a decision maker who chooses, whil... more In this paper we propose a solution to the Bayesian problem of a decision maker who chooses, while observing trial evidence, an optimal stopping time at which either to invest in a newly developed health care technology or abandon research. We show how optimal stopping boundaries can be computed as a function of the observed cumulative net benefit derived from the new health care technology. At the optimal stopping time, the decision taken is optimal and the decision maker either invest or abandon the technology with consequent health benefits to patients. The model takes into account the cost of decision errors and explicitly models these in the payoff to the heath care system. The implications in terms of opportunity costs of decisions taken at sub-optimal time is discussed and put in the value of information framework. In a case study it is shown that the proposed method, when compared with traditional ones, gives substantial economic gains both in terms of QALYs and reduced trial costs.
This paper considers the problem of investment timing under uncertainty in a duopoly framework. W... more This paper considers the problem of investment timing under uncertainty in a duopoly framework. When both firms want to be the first investor a coordination problem arises. Here, a method is proposed to deal with this coordination problem, involving the use of symmetric mixed strategies. The method is based on Fudenberg and Tirole (1985, Review of Economic Studies), where it was designed within a deterministic framework. The aim of our paper is to extend the applicability of this method to a stochastic environment. The need for this is exemplified by the fact that several recent contributions in multiple firm real option models make unsatisfactory assumptions to solve the coordination problem mentioned above. Moreover, our approach allows us to show that in many cases it is incorrect to claim that "the probability that both firms invest simultaneously, while it is only optimal for one firm to invest, is zero". * The authors thank Dolf Talman, Eric van Damme, participants of the Seventh Viennese Workshop on Optimal Control, Dynamic Games and Non-linear Dynamics, and seminar participants at CentER for their constructive comments.
In this paper we develop a stochastic dynamic model of predatory pricing. When profits evolve sto... more In this paper we develop a stochastic dynamic model of predatory pricing. When profits evolve stochastically, a negative demand shock can lead to bankruptcy for firms, which cannot immediately raise external capital. An assumption that firms are able to hoard liquidity creates incentives for market incumbents to use the predatory pricing strategies in order to keep the new players out of the industry. Applying game theoretic and dynamic programming techniques, we show that an incumbent firm may use a large cash reserve as a war chest to initiate a price war that could drive the entrant out of the market. Because of uncertainty the entrant may wish to take a chance and enter based on the probability of success. Therefore, realised market structure may be different for different sample paths of the stochastic process.
We present a new approach for the empirical investigation of agglomeration patterns. We examine t... more We present a new approach for the empirical investigation of agglomeration patterns. We examine the clustering of manufacturing firms by identifying patterns of spatial network formation that deviate from randomly generated networks. Using firm-level panel data from Vietnam we calculate transitivity, a measure to determine the strength of clustering of manufacturing firms. We then test whether the observed clustering of firms is greater than that of a randomly generated network. Our findings suggest that the extent of clustering is over and above that which can be attributed to the legal and regulatory framework, economic zoning, or population patterns.
As becomes apparent from the standard text books in industrial organization (cf. Tirole, 1988, Th... more As becomes apparent from the standard text books in industrial organization (cf. Tirole, 1988, The Theory of Industrial Organization), the analysis of the effects of uncertainty within this field is yet underdeveloped. This paper shows that the new theory of strategic real options can be used to fill this gap. Based on the work by Smets (1991) standard models are identified, and they are analyzed by applying a method involving symmetric mixed strategies. As an illustration, extensions regarding asymmetry, technology adoption and decreasing uncertainty over time are reviewed. Among others, it is found that the value of a high cost firm can increase in its own cost. Furthermore, it is established to what extent investments are delayed when technological progress is anticipated, and it is found that competition can be bad for welfare.
In this paper we analyse a dynamic model of investment under uncertainty in a duopoly, in which e... more In this paper we analyse a dynamic model of investment under uncertainty in a duopoly, in which each firm has an option to switch from the present market to a new market. We construct a subgame perfect equilibrium in mixed strategies and show that both preemption and attrition can occur along typical equilibrium paths. In order to determine the attrition region a two-dimensional constrained optimal stopping problem needs to be solved, for which we characterize the non-trivial stopping boundary in the state space. We explicitly determine Markovian equilibrium stopping rates in the attrition region and show that there is always a positive probability of eventual preemption, contrasting the deterministic version of the model. A simulation-based numerical example illustrates the model and shows the relative likelihoods of investment taking place in attrition and preemption regions.
As becomes apparent from the standard text books in industrial organization (cf. Tirole, 1988, Th... more As becomes apparent from the standard text books in industrial organization (cf. Tirole, 1988, The Theory of Industrial Organization), the analysis of the effects of uncertainty within this field is yet underdeveloped. This paper shows that the new theory of strategic real options can be used to fill this "empty hole". Based on the work by Smets (1991) standard models are identified, and they are analyzed by applying a method involving symmetric mixed strategies. As an illustration, extensions regarding asymmetry, technology adoption and decreasing uncertainty over time are reviewed. Among others, it is found that the value of a high cost firm can increase in its own cost. Furthermore, it is established to what extent investments are delayed when technologial progress is anticipated, and it is found that competition can be bad for welfare.
This paper analyses the accuracy of replicating portfolio methods in predicting asset prices. In ... more This paper analyses the accuracy of replicating portfolio methods in predicting asset prices. In a two-period, general equilibrium model with incomplete financial markets and heterogeneous agents, a computational study is conducted under various distributional assumptions. We focus on the price of a call option on an underlying risky asset. There is evidence that the value of the (approximate) replicating portfolio is a good approximation for the general equilibrium price for CRRA preferences, but not for CARA preferences. Furthermore, there is strong evidence that the introduction of the call option reduces market incompleteness and that the price of the underlying asset is unchanged. There is, however, inconclusive evidence on whether the availability of the option increases agents' welfare.
It is often argued that compared to a carbon tax, a volatile carbon price under an emissions trad... more It is often argued that compared to a carbon tax, a volatile carbon price under an emissions trading system poses a problem in the transition towards a low carbon economy. However, this paper shows that, when sufficiently positively correlated with the electricity price, carbon price uncertainty diminishes overall volatility because of a diversification effect. To get this result, we develop a dynamic real options model to analyze the impact of positively correlated price uncertainty on the timing of an investment decision. In contrast to static models, we show that even when the carbon price is initially the same under both policy instruments, the timing of the investment decision will typically be different. More importantly, we find that multiple correlated price uncertainties under an emissions trading system encourages investment more than less uncertainty under a carbon tax. Hence, to stimulate a low carbon (or discourage a carbon intensive) investment, an emissions trading system (carbon tax) is preferred. The policy reverts for higher levels of uncertainty and low correlations.
This paper analyses a real options model of mergers and takeovers between two firms experiencing ... more This paper analyses a real options model of mergers and takeovers between two firms experiencing different, but correlated, uncertainty. It is assumed that mergers do not just lead to efficiency gains, but are also an act of diversification. Due to the latter assumption the region where a merger is optimal is a bounded interval and not a half-space as in most real options models. It is shown that if the roles of the bidder and the target are determined endogenously the option value of the mergers vanishes completely, implying that, in equilibrium, the mergers occur sooner than when these roles are exogenously given. It is also shown that mergers can be optimal even if synergies are negative.
Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch ge... more Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence.
We introduce a model to sequentially analyse both clinical trials and cost effectiveness of a new... more We introduce a model to sequentially analyse both clinical trials and cost effectiveness of a new health technology. This provides a consistent decision-making framework for evaluating (i) evidence from clinical trials, (ii) the expected value of further trials, (iii) the costs and benefits of adoption/abandonment. We derive the optimal decision rule by appropriately extending the Bayesian framework of sequential hypothesis testing. We find that increased noise in the trial observations lowers the value of the new technology, but leads to decisions, in expectation, being taken faster. The expected total discounted costs of the trial are non-monotonic in the incremental trial costs. The proposed method numerically outperforms a frequentist approach in terms of total value, and expected trial duration and costs. Delays in trial observations can have big qualitative effects on value. The model is illustrated using data on standard versus robot-assisted laporascopic prostatectomy.
In this paper we propose a solution to the Bayesian problem of a decision maker who chooses, whil... more In this paper we propose a solution to the Bayesian problem of a decision maker who chooses, while observing trial evidence, an optimal stopping time at which either to invest in a newly developed health care technology or abandon research. We show how optimal stopping boundaries can be computed as a function of the observed cumulative net benefit derived from the new health care technology. At the optimal stopping time, the decision taken is optimal and the decision maker either invest or abandon the technology with consequent health benefits to patients. The model takes into account the cost of decision errors and explicitly models these in the payoff to the heath care system. The implications in terms of opportunity costs of decisions taken at sub-optimal time is discussed and put in the value of information framework. In a case study it is shown that the proposed method, when compared with traditional ones, gives substantial economic gains both in terms of QALYs and reduced trial costs.
This paper considers the problem of investment timing under uncertainty in a duopoly framework. W... more This paper considers the problem of investment timing under uncertainty in a duopoly framework. When both firms want to be the first investor a coordination problem arises. Here, a method is proposed to deal with this coordination problem, involving the use of symmetric mixed strategies. The method is based on Fudenberg and Tirole (1985, Review of Economic Studies), where it was designed within a deterministic framework. The aim of our paper is to extend the applicability of this method to a stochastic environment. The need for this is exemplified by the fact that several recent contributions in multiple firm real option models make unsatisfactory assumptions to solve the coordination problem mentioned above. Moreover, our approach allows us to show that in many cases it is incorrect to claim that "the probability that both firms invest simultaneously, while it is only optimal for one firm to invest, is zero". * The authors thank Dolf Talman, Eric van Damme, participants of the Seventh Viennese Workshop on Optimal Control, Dynamic Games and Non-linear Dynamics, and seminar participants at CentER for their constructive comments.
Uploads
Papers by Jacco Thijssen