Competition and Irreversible Investments under Uncertainty

We examine the effect of competition on investment decisions in an industry in which each firm has a completely irreversible investment opportunity and the product market has positive externalities for a small market size and negative externalities for a large market size. In the latter case, which corresponds to the traditional competitive industries, firms invest sequentially as market profitability develops. In the former case, which corresponds to industries in which investment is mutually beneficial, firms invest simultaneously after the market's profitability has developed sufficiently to gain all network benefits and to recover the option value of waiting. These extensions of a real options analysis may help explain rapid and sudden developments such as recent Internet investment, or explain the late take-off phenomenon of prolonged start-up problems, such as the case of fax machine production.Irreversible Investments, Real Options, Network Effects

Statistical Exploration of Fragmentation Phase Space Source Sizes in Nuclear Multifragmentation

The multiplicity distributions for individual fragment Z values in nuclear multifragmentation are binomial. The extracted maximum value of the multiplicity is found to depend on Z according to m=Z_0/Z, where Z_0 is the source size. This is shown to be a strong indication of statistical coverage of fragmentation phase space. The inferred source sizes coincide with those extracted from the analysis of fixed multiplicity charge distributions.Comment: 13 pages, 4 revised figures, some revised tex

Z-dependent Barriers in Multifragmentation from Poissonian Reducibility and Thermal Scaling

We explore the natural limit of binomial reducibility in nuclear multifragmentation by constructing excitation functions for intermediate mass fragments (IMF) of a given element Z. The resulting multiplicity distributions for each window of transverse energy are Poissonian. Thermal scaling is observed in the linear Arrhenius plots made from the average multiplicity of each element. ``Emission barriers'' are extracted from the slopes of the Arrhenius plots and their possible origin is discussed.Comment: 15 pages including 4 .ps figures. Submitted to Phys. Rev. Letters. Also available at http://csa5.lbl.gov/moretto

Opting-out in profit-sharing regulation

To avoid the extremely high profit levels found in recent experiences with price cap regulation, some regulators have proposed a profit- sharing mechanism that revises prices to the benefit of consumers. This paper investigates the conditions under which a regulator can implement such a profit-sharing scheme, having the option to revoke the contract if the firm's profits are excessive. When this option is included in the regulator's objective function and the cost of exercising it is not too high, a long-term equilibrium arises with a state-contingent sharing rule that guarantees and appropriate level of profits. The model determines both the level of profits that triggers the profit-sharing mechanism and the consequent price adjustment endogenously. There is an endogenous regulatory lag initially characterized by a price cap regulation, followed by a period of profit-sharing regime where the firm is motivated to cut prices to avoid revocation.public utilities, price cap regulation, profit-sharing, stochastic games

Firm Regulation and Profit-Sharing: A Real Option Approach

To avoid the extremely high profit levels found in recent experience of public utilities’ regulation, some regulators have introduced a profit-sharing (PS) rule that revises prices to the benefit of consumers. However, in order to be successful, a PS rule should satisfy appropriate incentive conditions. In this paper, we study the incentive properties of a second best PS mechanism designed by the regulator to induce a regulated monopolist to divert its "excessive" profits to the customers. In a real option model where a regulated monopolist manages a long-term franchise contract and the regulator has the option to revoke the contract if there is serious welfare loss, we first endogenously derive the welfare maximising PS rule under the verifiability of profits. We then explore the dynamic efficiency of this PS rule under non-verifiability of profits and study the firm’s incentive to comply with it in an infinite-horizon game. Finally, we derive the price adjustment path which follows the adoption of a PS rule in a price cap regulation. We show that the riskiness of the distribution of the firm’s future profits and the regulator’s cost in revoking the franchise contract are key factors in determining the equilibrium properties of a dynamic PS rule.

Discussion to: ‘Guidelines on the use of inverse velocity method as a tool for setting alarm thresholds and forecasting landslides and structure collapses’ by T. Carlà, E. Intrieri, F. Di Traglia, T. Nolesini, G. Gigli and N. Casagli

The paper ‘Guidelines on the use of inverse velocity method as a tool for setting alarm thresholds and forecasting landslides and structure collapses’ by T. Carlà, E. Intrieri, F. Di Traglia, T. Nolesini, G. Gigli and N. Casagli deals with a sensitive topic for landslide risk management. Exploring the pre-failure behaviour of four different case histories, the authors proposed standard procedures for the application of the inverse velocity method (INV, Fukuzono 1985). Specifically, they suggested guidelines for the filtering of velocity data and an original and simple approach to automatically set the first and the second alarm thresholds using the inverse velocity method. The present discussion addresses three different topics: (1) data filter selection according to the features of monitoring instrument; (2) the importance of data sampling frequency for the forecasting analysis and (3) the influence of the starting point (SP in this discussion) for the application of INV analysis. Moreover, based on this matter, a new method is proposed to update the INV analysis on an ongoing basis

Investment in Hospital Care Technology under Different Purchasing Rules: A Real Option Approach

In this article, we analyse the optimal investment decision in a new health care technology of a representative hospital that maximises its surplus in an uncertain environment. The new technology allows the hospital to increase the quality level of the care provided, but the investment is irreversible. The article uses the framework of the real option literature to show how the purchasing rules might influence the level of investment. We show that the investment in new technology is best incentivate within a long term contract where the number of treatments reimbursed depends on the level of investment made in the period when the technology is new. In this way, asymmetry of information does not affect the outcome of the contract. In our model in fact the purchaser can verify the level of the investment only at the end of each period but the purchasing rule has an anticipating effect on the decision to invest.Health care technologies, Medical quality, Irreversible investments, Real options