Abstract
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.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 383-389 |
| Number of pages | 7 |
| Journal | International Journal of Industrial Organization |
| Volume | 28 |
| Issue number | 4 |
| DOIs | |
| State | Published - Jul 2010 |
Funding
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 .
Keywords
- Capacity investment and disinvestment
- Demand uncertainty
- Dynamic stochastic games
- Markov-perfect equilibrium
- Strategic uncertainty
ASJC Scopus subject areas
- Industrial relations
- Aerospace Engineering
- Strategy and Management
- Industrial and Manufacturing Engineering