Capacity Expansion and the Size of Plants
AbstractScale economies in industrial plants confer a tradeoff on firms between the capacity of production facilities and the average cost of production. This tradeoff is central to firms' capacity expansion decisions in growing industries. This article imbeds the cost versus capacity tradeoff in an investment-timing game and explores the properties of equilibrium capacity expansion in growing industries with free entry. Some of the results are analytical and others are based on numerical examples using a particular class of demand functions. Equilibrium capacity expansion is suboptimal from a social point of view, but it involves zero profits. Small plants with high unit costs can coexist in a rent-dissipating equilibrium with large plants with low unit costs. Small plants sometimes precede and at other times follow the installation of large plants as the industry evolves along the equilibrium path.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by The RAND Corporation in its journal RAND Journal of Economics.
Volume (Year): 21 (1990)
Issue (Month): 4 (Winter)
Contact details of provider:
Web page: http://www.rje.org
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Asano, Hirokatsu, 2002. "An empirical analysis of lumpy investment: the case of US petroleum refining industry," Energy Economics, Elsevier, vol. 24(6), pages 629-645, November.
- Mills, David E. & Smith, William, 1996. "It pays to be different: Endogenous heterogeneity of firms in an oligopoly," International Journal of Industrial Organization, Elsevier, vol. 14(3), pages 317-329, May.
- Murto, Pauli & Nasakkala, Erkka & Keppo, Jussi, 2004. "Timing of investments in oligopoly under uncertainty: A framework for numerical analysis," European Journal of Operational Research, Elsevier, vol. 157(2), pages 486-500, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.