TY - JOUR
T1 - On the role of demand and strategic uncertainty in capacity investment and disinvestment dynamics
AU - Besanko, David
AU - Doraszelski, Ulrich
AU - Lu, Lauren Xiaoyuan
AU - Satterthwaite, Mark
N1 - Funding Information:
We thank Luis Cabral for helpful comments. Besanko and Doraszelski gratefully acknowledge financial support from the National Science Foundation under Grant No. 0615615 . Satterthwaite acknowledges gratefully that this material is based upon work supported by the National Science Foundation under Grant No. 0121541 .
PY - 2010/7
Y1 - 2010/7
N2 - Even mature industries seldom settle down into a long-run steady state. Fluctuations in demand disrupt the status quo and call for firms to adjust their capacities on an ongoing basis. We construct a fully dynamic model of an oligopolistic industry with lumpy capacity and lumpy investment/disinvestment decisions. In addition to uncertainty about the evolution of demand, a firm faces strategic uncertainty concerning the decisions of its rivals. We numerically solve the model for its Markov-perfect equilibria. For one set of parameter values, three equilibria exist, and while all of them have simple, intuitive structures, they exhibit widely varying patterns of response to demand shocks. At one extreme, one firm dominates the industry almost as a monopolist and changes its capacity to accommodate demand. At the other extreme, the larger firm keeps its capacity nearly constant while the smaller firm acts as the swing producer.
AB - Even mature industries seldom settle down into a long-run steady state. Fluctuations in demand disrupt the status quo and call for firms to adjust their capacities on an ongoing basis. We construct a fully dynamic model of an oligopolistic industry with lumpy capacity and lumpy investment/disinvestment decisions. In addition to uncertainty about the evolution of demand, a firm faces strategic uncertainty concerning the decisions of its rivals. We numerically solve the model for its Markov-perfect equilibria. For one set of parameter values, three equilibria exist, and while all of them have simple, intuitive structures, they exhibit widely varying patterns of response to demand shocks. At one extreme, one firm dominates the industry almost as a monopolist and changes its capacity to accommodate demand. At the other extreme, the larger firm keeps its capacity nearly constant while the smaller firm acts as the swing producer.
KW - Capacity investment and disinvestment
KW - Demand uncertainty
KW - Dynamic stochastic games
KW - Markov-perfect equilibrium
KW - Strategic uncertainty
UR - http://www.scopus.com/inward/record.url?scp=77955660907&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=77955660907&partnerID=8YFLogxK
U2 - 10.1016/j.ijindorg.2010.02.013
DO - 10.1016/j.ijindorg.2010.02.013
M3 - Article
AN - SCOPUS:77955660907
VL - 28
SP - 383
EP - 389
JO - International Journal of Industrial Organization
JF - International Journal of Industrial Organization
SN - 0167-7187
IS - 4
ER -