Developing real option game models

By mixing concepts from both game theoretic analysis and real options theory, an investment decision in a competitive market can be seen as a ‘‘game’’ between firms, as firms implicitly take into account other firms’ reactions to their own investment actions. We review two decades of real option game models, suggesting which critical problems have been ‘‘solved’’ by considering game theory, and which significant problems have not been yet adequately addressed. We provide some insights on the plausible empirical applications, or shortfalls in applications to date, and suggest some promising avenues for future research

Asset Stranding is Inevitable: Implications for Optimal Regulatory Design

The irreversibility of much infrastructure investment means that some assets will stop earning revenue before the end of their physical lives; they will be stranded. Under traditional rate of return regulation firms are guaranteed the ability to recover the costs of investment insulating them from the consequences of asset stranding. Under modern incentive regulation firms are allowed to earn revenue just sufficient to cover the costs of a hypothetical efficient firm which provides services at minimum cost exposing them to the risk of asset stranding. By actively encouraging competition regulators increase this risk. We suggest two conditions applicable to both regimes which must be met if regulation is to be "reasonable": the regulated firm must not lose value from investment and it cannot collect more revenue than would the lowest cost alternative provider. This implies that regulated firms should be allowed to earn the riskless rate of return on the historical cost of their assets under rate of return regulation and a different (generally higher) rate of return on the replacement cost of their assets under incentive regulation. The risk premium depends on both the systematic and unsystematic risk of demand shocks. Since customers bear the risk of asset stranding under rate of return regulation and shareholders bear this risk under incentive regulation welfare is higher under incentive regulation as long as customers are more risk-averse than shareholders. We show that when there is a choice between reversible and irreversible technology there is no price specification under rate of return regulation that will induce the firm to choose the efficient bundle of technology while under incentive regulation the firm will choose the efficient mix of technologies. That is incentive regulation allocates the risk of asset stranding efficiently and also gives firms the incentive to reduce this risk to efficient levels. Finally incentive regulation has less demanding information requirements than traditional rate of return regulation

Competing for attention in social communication markets

We investigate the incentives for social communication in the new social media technologies. Three features of online social communication are represented in the model. First, new social media platforms allow for increased connectivity; i.e., they enable sending messages to many more receivers, for the same fixed cost, compared to traditional word of mouth. Second, users contribute content because they derive status- or image-based utility from being listened to by their peers. Third, we capture the role of social differentiation, or how social distance between people affects their preferences for messages. In the model, agents endogenously decide whether to be a sender of information and then compete for the attention of receivers. An important point of this paper is that social communication incentives diminish even as the reach or the span of communication increases. As the span of communication increases, competition between senders for receiver attention becomes more intense, resulting in senders competing with greater equilibrium messaging effort. This in turn leads to lower equilibrium payoffs and the entry of fewer senders. This result provides a strategic rationale for the socalled participation inequality phenomenon, which is a characteristic of many social media platforms. We also show that social differentiation may enhance or deter sender entry depending on whether it can be endogenously influenced by senders. Finally, we examine how the underlying network structure (in terms of its density and its degree distribution) affects communication and uncover a nonmonotonic pattern in that increased connectivity first increases and then reduces the entry of senders

Rent Generation During the Transition to a Managed Fishery: The Case of the New Zealand ITQ System

This paper examines the generation of resource rent during the transition from an over-exploited to an efficiently managed fishery. A simple theoretical model is used to demonstrate that current industry returns may below or even negative during this adjustment phase. A case in point is the New Zealand commercial fisheries which have recently become subject to a Quota Management System. Three sources of evidence on the level of resource rents generated during the initial years of the Quota Management System are examined and compared. These sources are: annual profitability data; the market price of perpetual quota; and the market price of annual lease quota. The evidence in some cases appears to be contradictory and an attempt is made to resolve or explain such differences. It is concluded that a better understanding of price determination in the quota market is required in order to draw correct inferences about rent generation.Rent, Generation, Transition, Individual, Transferable, Quotas, Fishery, Management, New Zealand, Environmental Economics and Policy, Resource /Energy Economics and Policy,

Demand uncertainty and investment in the restaurant industry

Since the collapse of the housing market, the prolonged economic uncertainty lingering in the U.S. economy has dampened restaurant performance. Economic uncertainty affects consumer sentiment and spending, turning into demand uncertainty. Nevertheless, the highly competitive nature of the restaurant industry does not allow much room for restaurants to actively control prices, leaving most food service firms exposed to demand uncertainty. To investigate the impact of demand uncertainty in the restaurant industry, this study focused on the implications of demand uncertainty for investment. The first essay in chapter 3 examined the impact of demand uncertainty on investment and how the impact varies with industry-specific features: franchising and segment. The results showed that the investment rate decreases with the level of uncertainty and the association is nonlinear. That is, the investment drops more rapidly as the level of uncertainty increases. This study further revealed that there is no significant moderating effect of franchising on the uncertainty-investment relationship. When it comes to segment, full-service restaurants are more adversely affected by demand uncertainty than limited-service restaurants. The second essay in chapter 4 explored how managers cope with uncertainty when making investment decisions. In the absence of a clear imperative of what is efficient, managers are likely to scan other peers in the market and mimic their behavior. Focusing on this idea, it tested whether the investment is influenced by peers’ investment activities and whether peer-sensitive firms produce better investment outcomes. Consistent with the hypotheses, sample restaurant firms appeared to be affected by their peers in making investments. The results also indicate that uncertainty is a powerful force that leads firms to follow peers. In addition, it was seen that investment of peer-sensitive firms is not as effective as that of less-sensitive firms in growing market share. Lastly, the final piece of dissertation in chapter 5 analyzed the effectiveness of investment made under uncertainty. The findings indicate that a rise in investment in times of high uncertainty leads to a larger market share, suggesting that well-targeted investment can help firms turn crisis into opportunity to pull ahead of competitors who retreat in the face of uncertainty. However, increased depreciation costs and dwindling sales can hurt the profit margin in uncertain times