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A Computable Dynamic Oligopoly Model of Capacity Investment

Author

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  • Gautam Gowrisankaran
  • Philipp Schmidt-Dengler

Abstract

This paper analyzes dynamic oligopoly models where investment is the principal strategic variable of interest, there are a large number of investment choices, and there are privately observed shocks to the marginal cost of investment. We show that simulation methods to compute these models can result in non-existence of pure strategy equilibrium. We provide a computationally efficient method to calculate optimal investment probabilities and show how to apply our methods to the recent dynamic empirical literature. The method iteratively finds the investment choices chosen with positive probability and cutoff values of the private information shocks across options in this set.

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  • Gautam Gowrisankaran & Philipp Schmidt-Dengler, 2024. "A Computable Dynamic Oligopoly Model of Capacity Investment," NBER Working Papers 32399, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32399
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    More about this item

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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