Investment strategies of duopoly firms with asymmetric time-to-build under a jump-diffusion model

This paper employs a two-factor jump-diffusion model to investigate the optimal investment timing and capacity choice of the duopoly firms in the presence of uncertain and asymmetric time-to-build. By assuming that both the market demand and investment cost follow the jump-diffusion process, we show that the impacts of uncertainty of time-to-build on duopoly firms’ the optimal investment decisions depend on the directions of jumps in demand and investment cost. Moreover, the asymmetry of time-to-build makes it possible for the dominated firm to preempt the market successfully and becomes the leader. The leader’s capacity level increases with the dominated firm’s time-to-build and the follower’s decreases, even if the dominated firm is the leader. We also apply numerical simulation to compare the main results between two-factor diffusion model and two-factor jump-diffusion model.