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A Computable Dynamic Oligopoly Model of Capacity Investment

Author

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  • Gautam Gowrisankaran
  • Philipp Schmidt-Dengler

Abstract

We consider widely used dynamic models where every period, each agent receives a private information shock to investment marginal cost and chooses among many ordered investment levels. We provide a computationally fast method to calculate optimal investment probabilities given value functions. Our method finds shock cutoffs between investment choices, accounting for the possibility that some levels are dominated. Other methods to compute these models may result in non-existence of pure strategy equilibrium or only work under restrictive assumptions. Multinomial logit models with choice-specific shocks can lead to counterintuitive predictions. Our method is useful to researchers estimating dynamic models of investment.

Suggested Citation

  • 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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    Cited by:

    1. Takeshi Fukasawa & Hiroshi Ohashi, 2025. "Investment Dynamics and Merger Policy: Long-run Effects of Horizontal Merger in Oligopolistic Market," CIRJE F-Series CIRJE-F-1264, CIRJE, Faculty of Economics, University of Tokyo.

    More about this item

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C57 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Econometrics of Games and Auctions

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