Leaders, Followers, and Risk Dynamics in Industry Equilibrium

Abstract

Standard-Nutzungsbedingungen: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. AbstractWe study own and rival risk in a dynamic duopoly with a homogeneous output good. A competitor's options to adjust capacity reduce own-firm risk through a simple hedging channel. For example, if a rival possesses a growth option, an increase in industry demand directly enhances current profits but also encourages value-reducing competitor expansion. As a consequence, when a leader and a follower emerge in equilibrium, risk dynamics depart substantially from previouslystudied simultaneous move benchmarks. Own-firm and competitor required returns tend to move together through contractions and oppositely during expansions, providing testable new empirical predictions. AbstractWe study own and rival risk in a dynamic duopoly with a homogeneous output good. A competitor's options to adjust capacity reduce own-firm risk through a simple hedging channel. For example, if a rival possesses a growth option, an increase in industry demand directly enhances current profits but also encourages value-reducing competitor expansion. As a consequence, when a leader and a follower emerge in equilibrium, risk dynamics depart substantially from previously-studied simultaneous move benchmarks. Own-firm and competitor required returns tend to move together through contractions and oppositely during expansions, providing testable new empirical predictions.JEL Classification: C23, C35.

Asymmetric Suppliers’ Optimal Investment Timing Decisions

“…This reduced-form set-up is designed to grant the leader a persistent first-mover advantage, thereby motivating the two suppliers to preempt. Although we only focus on the preemptive investment timing game, our model can be employed to analyze the positive externality of investment where larger investment complementarities may lead the two suppliers to invest simultaneously, e.g., Pawlina and Kort (2006) and Carlson et al (2014). As a result, the two suppliers play a continuous-time investment timing game.…”

“…They also find that the proportion of cash in supplier value increases in competition but only for relatively financially constrained suppliers by using patent data. Carlson et al (2014) also study the strategic role of cash in an industry. They find that both cash holdings and R&D intensity increase with the winner advantage and time delay in outside financing, and decrease with entry costs.…”

“…Different from the mentioned literature, this paper focuses on the interrelated effects of financing capacity and competition on suppliers' investment decisions. Employing a leader-follower equilibrium similar to that of Carlson et al (2014), we study the impacts of own and rival's asymmetric financing capacities on the two suppliers' roles and decisions in an investment timing game when the two suppliers are subject to asymmetric liquidity constraints and strategically compete to win a first mover advantage of an investment opportunity.…”

“…They generally find that the low-cost supplier will invest EJBE 2019, 12(23) earlier due to the potential preemptive investment of the high-cost supplier when the asymmetry of investment cost is small. Recently, Carlson et al (2014) use a similar framework to examine the effects of a supplier's expansion and contraction options on the risk dynamics of the required returns when there is a rival supplier owning the same rights.…”

Real options game over the business cycle

“…They show that a greater FMA will lead a firm to adopt a preemptive investment threshold which is significantly lower than its optimal investment trigger. Recently, Carlson et al (2011) focus on the effects of a firm's expansion and contraction options on risk dynamics of the required returns when there exists a rival firm owning the same flexibilities. In sum, they generally find that competition will erode the values of wait-and-see options and their Nash equilibriums meet the requirement of Markov perfect closed-loop equilibriums which satisfy continuous-time dynamic subgame perfection.…”