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The determination of the price of capital goods: A differential game approach

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  • Guerrazzi, Marco
  • Candido, Giuseppe

Abstract

In this paper, building upon a q-model of investment with adjustment costs, we address the strategic determinants of the price of newly installed productive capacity. Specifically, we develop a differential game in which a competitive producer of consumption goods deals with a seller of capital goods endowed with market power. From a theoretical perspective, we show that an open-loop Stackelberg equilibrium with non-cooperative features requires the producer of consumption goods to be more impatient than the seller of capital goods. Thereafter, relying on some numerical simulations, we show that our theoretical setting is able to replicate the countercyclical pattern of the relative price of capital goods as well as its negative relationship with the investment-output ratio.

Suggested Citation

  • Guerrazzi, Marco & Candido, Giuseppe, 2023. "The determination of the price of capital goods: A differential game approach," MPRA Paper 119118, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:119118
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    References listed on IDEAS

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    More about this item

    Keywords

    Price of capital goods; Tobin's q; Internal and external adjustment costs; Differential games.;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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