Presented by Jiyoon Chung Pacheco de Almeida, Goncalo and Peter Zemsky (2003). The effect of time-to-build on strategic investment under uncertainty. Rand Journal of Economics, 34 (1): 167-183. Presented by Jiyoon Chung

Overview Research question: Does time-to-build matter for the theory of strategic investment under uncertainty? Model Equilibrium analysis Comparative statics Conclusion

Model A firm maximizes a weighted average of its expected period-II and –III revenues less the expected cost of investment.

Equilibrium Analysis Equilibrium Typology Delay equilibrium: Both firms wait to invest. Incremental Cournot equilibrium: Both firms make the same incremental investment. Commit-delay equilibrium: One of the firms commits while the other delays investment. Commit-incremental equilibrium: One of the firms commits, while the other makes an incremental investment.

Equilibrium Analysis The magnitude of uncertainty determines which equilibrium exists. Without time-to-build, If uncertainty great  Delay If uncertainty low  Commit-delay With time-to-build, an initial price premium exists The tradeoff between commitment and flexibility is altered If short time-to-build and low uncertainty  Commit-incremental If long time-to-build and low uncertainty  Incremental Cournot

Comparative Statics If time-to-build increases, Social welfare decreases The extent to which firms exploit the option to wait decreases The price premium decreases

Conclusion For a sufficiently long time-to-build or sufficiently small uncertainty, Incremental Cournot is the unique equilibrium Introducing time-to-build Shifts (non-monotonically) the classic tradeoff between commitment and exploiting the option to wait Gives rise to novel types of equilibria where firms make incremental investments Links models of investment timing to the evolution of product prices