Dynamic oligopoly with capacity adjustment costs

Stanley S. Reynolds

doi:10.1016/0165-1889(91)90003-J

Dynamic oligopoly with capacity adjustment costs

Stanley S. Reynolds

Economics

Research output: Contribution to journal › Article › peer-review

63 Scopus citations

Abstract

The literature on strategic investment emphasized the case of completely irreversible investment. This paper considers an oligopoly model in which investment is reversible and capacity is subject to adjustment costs. An n-player, linear-quadratic differential game is analyzed. Existence and characterization results for perfect equilibrium feedback strategies are provided. Feedback strategies provide incentives for each player to invest strategically so as to preempt subsequent expansion by rivals. A larger set of perfect equilibria is constructed by using memory-dependent trigger strategies. Equilibria of this type are shown to support joint-value maximization (for some initial states) and asymmetric steady states.

Original language	English (US)
Pages (from-to)	491-514
Number of pages	24
Journal	Journal of Economic Dynamics and Control
Volume	15
Issue number	3
DOIs	https://doi.org/10.1016/0165-1889(91)90003-J
State	Published - Jul 1991

ASJC Scopus subject areas

Economics and Econometrics
Control and Optimization
Applied Mathematics

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AB - The literature on strategic investment emphasized the case of completely irreversible investment. This paper considers an oligopoly model in which investment is reversible and capacity is subject to adjustment costs. An n-player, linear-quadratic differential game is analyzed. Existence and characterization results for perfect equilibrium feedback strategies are provided. Feedback strategies provide incentives for each player to invest strategically so as to preempt subsequent expansion by rivals. A larger set of perfect equilibria is constructed by using memory-dependent trigger strategies. Equilibria of this type are shown to support joint-value maximization (for some initial states) and asymmetric steady states.

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Dynamic oligopoly with capacity adjustment costs

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