Lumpy Capacity Investment and Disinvestment Dynamics
AbstractCapacity addition and withdrawal decisions are among the most important strategic decisions made by firms in oligopolistic industries. In this paper, we develop and analyze a fully dynamic model of an oligopolistic industry with lumpy capacity and lumpy investment/disinvestment. We use our model to answer two questions. First, what economic factors facilitate preemption races? Second, what economic factors facilitate capacity coordination? We show that low product differentiation, low investment sunkness, and high depreciation promote preemption races. We also show that low product differentiation and low investment sunkness promote capacity coordination. Although depreciation removes capacity, it may impede capacity coordination. Finally, we show that, at least over some range of parameter values, firms' expectation plays a key role in determining whether or not industry dynamics are characterized by preemption races and capacity coordination. Taken together, our results suggest that preemption races and excess capacity in the short run often go hand-in-hand with capacity coordination in the long run.
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.
Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 106.
Date of creation: 2009
Date of revision:
Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Dan Kovenock & Raymond J. Deneckere, 1996. "Bertrand-Edgeworth duopoly with unit cost asymmetry (*)," Economic Theory, Springer, vol. 8(1), pages 1-25.
- Dan Kovenock & Raymond Deneckere & Tom Faith & Beth Allen, 2000.
"Capacity precommitment as a barrier to entry: A Bertrand-Edgeworth approach,"
Springer, vol. 15(3), pages 501-530.
- Beth Allen & Raymond Deneckere & Tom Faith & Dan Kovenock, 1995. "Capacity precommitment as a barrier to entry: a Bertrand-Edgeworth approach," Staff Report 187, Federal Reserve Bank of Minneapolis.
- Beth Allen & Raymond Deneckere & Tom Faith & Dan Kovenock, 1994. "Capacity Precommitment as a Barrier to Entry:A Bertrand-Edgeworth Approach," Industrial Organization 9411002, EconWPA, revised 14 Nov 1994.
- Allen, B. & Deneckere, R. & Faith, T. & Kovenock, D., 1994. "Capacity Precommitment as a Barrier to Entry: A Bertrand-Edgeworth Approach," Purdue University Economics Working Papers 1062, Purdue University, Department of Economics.
- Allen, B. & Deneckere, R. & Faith, T. & Kovenock, D., 1994. "Capacity Precommitment as a Barrier to Entry: A Bertrand- Engeworth Approach," Papers 9483, Tilburg - Center for Economic Research.
- Richard J. Gilbert and Marvin Lieberman., 1987.
"Investment and Coordination in Oligopolistic Industries,"
Economics Working Papers
8730, University of California at Berkeley.
- Richard J. Gilbert & Marvin Lieberman, 1987. "Investment and Coordination in Oligopolistic Industries," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 17-33, Spring.
- Gilbert, Richard J., 1987. "Investment and Coordination in Oligopolistic Industries," Department of Economics, Working Paper Series qt51b0f7sq, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Pankaj Ghemawat, 1997. "Games Businesses Play: Cases and Models," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262071827, December.
- Jeffrey I. Bernstein, 1992.
"Price Margins and Capital Adjustment: Canadian Mill Products and Pulp and Paper Industries,"
NBER Working Papers
3982, National Bureau of Economic Research, Inc.
- Bernstein, Jeffrey I., 1992. "Price margins and capital adjustment : Canadian mill products and pulp and paper industries," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 491-510, September.
- Jeffery Bernstein, 1991. "Price Margins and Capital Adjustment: Canadian Mill Products and Pulp and Paper Industries," Carleton Economic Papers 91-07, Carleton University, Department of Economics, revised Sep 1992.
- Andrew Wood, 2005. "Investment interdependence and the coordination of lumpy investments: evidence from the British brick industry," Applied Economics, Taylor & Francis Journals, vol. 37(1), pages 37-49.
- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).
If references are entirely missing, you can add them using this form.