Markov-Perfect Nash Equilibria in Models with a Single Capital Stock

TI Discussion Paper No. 06-055/1

26 Pages Posted: 6 Jul 2006

See all articles by Engelbert J. Dockner

Engelbert J. Dockner

WU Vienna University of Economics and Business (deceased)

Florian Wagener

University of Amsterdam - Center for Nonlinear Dynamics in Economics and Finance (CeNDEF) - Department of Quantitative Economics; Tinbergen Institute

Date Written: May 2006

Abstract

We examine a model in which two firms strategically compete in a duopolistic product market. Firms produce a homogenous product and face stochastic industry demand. Each firm has a single option either to expand or contract capacity, and hence output. In this setup we analyze the risk characteristics of industries as well as single firms and look at corresponding asset price dynamics. We focus on sequential exercise of options. We find that strategic competition in the product market is risk reducing. Irrespective of expansion or contraction the presence of strategically interacting rivals causes firm's risk to decline. This is the consequence of a simple hedging argument. Moreover, we find that own firm and industry characteristics have opposite risk implications in case of expansion and contraction. Empirical evidence, however, is that a strong negative relationship exists between firm and rival risk measures.

Keywords: Capital accumulation games, Markov equilibria, Resource games, Differential games

JEL Classification: C73, D92, Q22

Suggested Citation

Dockner, Engelbert J. and Wagener, Florian O.O., Markov-Perfect Nash Equilibria in Models with a Single Capital Stock (May 2006). TI Discussion Paper No. 06-055/1, Available at SSRN: https://ssrn.com/abstract=912663 or http://dx.doi.org/10.2139/ssrn.912663

Engelbert J. Dockner (Contact Author)

WU Vienna University of Economics and Business (deceased)

Heiligenstaedter Strasse 46-48
Vienna, 1190
Austria
+431313366302 (Phone)
+43131336906302 (Fax)

HOME PAGE: http://www.wu.ac.at/finance/people/faculty/list/dockner

Florian O.O. Wagener

University of Amsterdam - Center for Nonlinear Dynamics in Economics and Finance (CeNDEF) - Department of Quantitative Economics ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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