Competition of Gas Pipeline Projects: Game of Timing

Klaassen, G., Kryazhimskiy, A.V., & Tarasyev, A.M. (2001). Competition of Gas Pipeline Projects: Game of Timing. IIASA Interim Report. IIASA, Laxenburg, Austria: IR-01-037

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Abstract

The paper addresses the issue of optimal investments in innovations with strong long-term aftereffects. As an example, investments in the construction of gas pipelines are considered. The most sensible part of a gas pipeline project is the choice of the commercialization time, i.e., the time of the finalizing the construction of the pipeline. If several projects compete for a gas market, the choices of the commercialization times determine the future structure of the market and thus become specially important. Rational decisions in this respect can be associated with Nash equilibria in a game between the projects. In this game, the total benefits gained during the pipelines' life periods act as payoffs and commercialization times as strategies. The goal of this paper is to characterize multiequilibria in this "game of timing". The case of two players is studied in detail. A key point in the analysis is the observation that all player's best response commercialization times concentrate at two instants that are fixed in advance. This reduces decisionmaking to choose between two fixed investment policies, "fast" and "slow", with the prescribed commercialization times. A description of a simple algorithm that finds all the Nash equilibria composed of "fast" and "slow" scenarios include the paper.

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