Impact of Bayesian Learning and Externalities on Strategic Investment Academic Article

abstract

• We investigate the interplay between learning effects and externalities in the problem of competitive investments with uncertain returns. We examine a game theoretic duopoly investment model in which (i) a firm can learn about the profitability of the investment by observing the performance of the first mover and (ii) externalities exist between the investments of two firms. We find a region of a war of attrition between the two firms in which the interplay between externalities and learning gives rise to counterintuitive effects on investment strategies and payoffs. In particular, we find that, contrary to the conventional war of attrition where an increase in benefits for the follower generally delays the first move, an increase in the rate of learningwhich tends to benefit the followercan hasten the first investment. This paper was accepted by James Smith, decision analysis.

authors

• Agrawal, Anupam

published proceedings

• MANAGEMENT SCIENCE

author list (cited authors)

• Kwon, H. D., Xu, W., Agrawal, A., & Muthulingam, S.

citation count

• 14

complete list of authors

• Kwon, H Dharma||Xu, Wenxin||Agrawal, Anupam||Muthulingam, Suresh

publication date

• February 2016

publisher

• Institute for Operations Research and the Management Sciences (INFORMS)  Publisher

published in

• Management science  Journal

keywords

• Decision Analysis
• Dynamic Programming
• Games
• Group Decisions
• Optimal Control
• Sequential
• Stochastic

Digital Object Identifier (DOI)

• 10.1287/mnsc.2015.2156

start page

• 550

end page

• 570

volume

• 62

issue

• 2

URL

• http://dx.doi.org/10.1287/mnsc.2015.2156

user-defined tag

• 9 Industry, Innovation and Infrastructure