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Dynamic Models of Oligopoly by J. Tirole, D. Fudenberg

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3. PREEMPTION

Section 2 examined competition in continuous (divisible) investments such as learning and goodwill. Many investments, however, are discrete (lumpy) and the first mover advantage described in section 2 takes an extreme form, that of preemption. This section treats three examples of competition in lumpy investments. Two of them, the adoption of a new technology and location in a growing spatial market, are classic instances of such investments. In the third example, R&D, the firm’s investment (research expenditures) and its outcome (the discovery of a new technology) differ in that, to some extent, the investment is continuous while its outcome is lumpy. Because the effects of the R&D outcome on market structure and payoffs closely ...

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