Template-Type: ReDIF-Paper 1.0
Author-Name: Doriana Ruffino
Author-X-Name-First: Doriana 
Author-X-Name-Last: Ruffino
Author-Email: rdoriana@bu.edu
Author-Workplace-Name: Boston University, Department of Economics

Author-Name: Jonathan Treussard	
Author-X-Name-First: Jonathan 
Author-X-Name-Last:   Treussard
Author-Email: jtreussa@bu.edu
Author-Workplace-Name: Boston University, Department of Economics

Title:Lumps and Clusters in Duopolistic Investment Games:
An Early Exercise Premium Approach


Abstract:This paper exploits the early exercise premium representation to investigate strate-
gic investment policies in a duopolistic continuous-time real options game. Assuming
exogenous firm roles, we find that (i) as the leader installs its newly purchased capital,
the follower's optimal investment policy displays a monotonically decreasing pattern,
which finds its justifcation in the temporary reallocation of the leader's revenues to its
competitor, and (ii) once the leader has completed its investment process, the follower's
trigger boundary is proportional to the fixed cost of investment weighted by the present
value of future revenues per unit of market demand. Moreover, we demonstrate that
the follower's willingness to delay investment is enhanced by a longer time-to-build and
a more volatile market demand, while it is weakened by a higher quality improvement
upon replacement and by a higher expected growth in market demand. Finally, we
study the probability that the follower mimics the leader?s decision within the leader's
time-to-build window.
Length:50 pages
Creation-Date: 2006-08
Revision-Date: 
Publication-Status:
File-URL: http://www.bu.edu/econ/workingpapers/papers/RuffinoTreussard081806.pdf
File-Format: Application/pdf
File-Function: 
Number: WP2006-044
Classification-JEL:
Keywords:
Handle: RePEc:bos:wpaper:WP2006-044