Carlson, Murray Dockner, Engelbert Fisher, Adlai Giammarino, Ron
Year of Publication:
Beiträge zur Jahrestagung des Vereins für Socialpolitik 2010: Ökonomie der Familie - Session: Dynamic Models of Investment D8-V2
We 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.
Growth options and industry risk asset pricing and investment decisions risk dynamics in oligopolistic industries