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Capacity Accumulation Games with Technology Constraints

In: Dynamic Games in Economics

Author

Listed:
  • Jacek B. Krawczyk

    (Victoria University of Wellington)

  • Vladimir P. Petkov

    (Victoria University of Wellington)

Abstract

This chapter examines the conduct and performance of large mutually dependent firms. Its objective is to study contractual relationships in a dynamic bilateral monopoly, where producers’ investment choices must obey a technology constraint. This is in contrast to previous studies of accumulation games, in which technological interdependence was not explicitly allowed for. The analysis focuses on investment incentives and payoff allocation under two regimes: (1) contracting based on input quantities, and (2) contracting based on final revenues. The technologically feasible equilibrium strategies and the terms of trade that support them are characterized with intuitive necessary conditions which reflect the players’ intertemporal trade-offs. To assess the factors that influence efficiency and market power, the chapter presents a linear-quadratic example. Our simulations indicate that contracts based on input quantities generate higher joint payoffs and tend to benefit the input producer.

Suggested Citation

  • Jacek B. Krawczyk & Vladimir P. Petkov, 2014. "Capacity Accumulation Games with Technology Constraints," Dynamic Modeling and Econometrics in Economics and Finance, in: Josef Haunschmied & Vladimir M. Veliov & Stefan Wrzaczek (ed.), Dynamic Games in Economics, edition 127, pages 161-185, Springer.
    • Handle: RePEc:spr:dymchp:978-3-642-54248-0_8
    DOI: 10.1007/978-3-642-54248-0_8
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