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Capacity Expansion Games with Application to Competition in Power Generation Investments

Author

Listed:
  • René Aïd

    (LEDa - Laboratoire d'Economie de Dauphine - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres)

  • Liangchen Li

    (UC Santa Barbara - University of California [Santa Barbara] - UC - University of California)

  • Michael Ludkovski

    (UC Santa Barbara - University of California [Santa Barbara] - UC - University of California)

Abstract

We consider competitive capacity investment for a duopoly of two distinct producers. The producers are exposed to stochastically fluctuating costs and interact through aggregate supply. Capacity expansion is irreversible and modeled in terms of timing strategies characterized through threshold rules. Because the impact of changing costs on the producers is asymmetric, we are led to a nonzero-sum timing game describing the transitions among the discrete investment stages. Working in a continuous-time diffusion framework, we characterize and analyze the resulting Nash equilibrium and game values. Our analysis quantifies the dynamic competition effects and yields insight into dynamic preemption and over-investment in a general asymmetric setting. A case-study considering the impact of fluctuating emission costs on power producers investing in nuclear and coal-fired plants is also presented.

Suggested Citation

  • René Aïd & Liangchen Li & Michael Ludkovski, 2017. "Capacity Expansion Games with Application to Competition in Power Generation Investments," Post-Print hal-02313872, HAL.
    • Handle: RePEc:hal:journl:hal-02313872
    DOI: 10.1016/j.jedc.2017.08.002
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    Citations

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    Cited by:

    1. René Aïd & Luciano Campi & Liangchen Li & Mike Ludkovski, 2021. "An Impulse-Regime Switching Game Model of Vertical Competition," Dynamic Games and Applications, Springer, vol. 11(4), pages 631-669, December.
    2. Bichuch, Maxim & Hobbs, Benjamin F. & Song, Xinyue, 2023. "Identifying optimal capacity expansion and differentiated capacity payments under risk aversion and market power: A financial Stackelberg game approach," Energy Economics, Elsevier, vol. 120(C).
    3. Liangchen Li & Michael Ludkovski, 2018. "Stochastic Switching Games," Papers 1807.03893, arXiv.org.
    4. Ren'e Aid & Luciano Campi & Liangchen Li & Mike Ludkovski, 2020. "An Impulse-Regime Switching Game Model of Vertical Competition," Papers 2006.04382, arXiv.org.

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