Strategic Investment Decisions under Uncertainty, Tacit Collusion and Product Differentiation

Abstract

Abstract This paper examines the effects of uncertainty, tacit collusion and product differentiation on strategic investment policy. The model demonstrates the equilibrium under competitive investments and under cooperative investments. In competitive investments, two firms compete by investing to preempt each other, and ultimately one firm invests earlier than its rival. In cooperative investments, two firms invest simultaneously and collude on their outputs. Cooperative investments are likely to be sustainable only under conditions of high volatility of future demand, low probability of market extinction and high degree of product differentiation, while competitive investments are sustainable for any set of these parametric values.Real Options, Imperfect Competition, Tacit Collusion, Product Differentiation, G31, G13, D21, D43,