Introduction to the Special Issue on Industrial Organization

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Dynamic games have proven to be a natural and powerful tool in modeling and understanding a number of important phenomena in industrial organization. This framework allows for a parsimonious modeling of market interactions over time, when at least some of the economic agents are non-atomic and decisions at a given moment impact the nature of market competition in the future in a way captured by natural state variables. A key feature of this setting is that, being cast most often in infinite-horizon models, dynamic games avoid endof-horizon effects that can easily condition conclusions obtained with finite-horizon models, in particular with the two-stage paradigm commonly used in industrial organization. This special issue contains both original articles and reviews of important recent strands of literature dealing with the application of the dynamic games paradigm in industrial organization, broadly defined. The theory of real options initiated in the seminal book by Dixit and Pindyck [5] is a powerful tool to examine the timing of lumpy irreversible investment. Huberts, Huisman, Kort and Lavrutich review a recent strand of the real options literature where decision makers choose both the timing and the size of the investment. This is an important extension that shows that, while the general wisdom that more uncertainty diminishes the value of waiting remains true, more uncertainty may also generate larger investments: Uncertainty may not hurt growth. An important and common feature in the real options literature is that the firms are assumed to be aware of an investment opportunity at all points in time. Bruno Versaevel examines an original research question related to irreversible lumpy investment: Firms do