Lumpy Capacity Investment and Disinvestment Dynamics
Capacity 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.
|Date of creation:||2009|
|Date of revision:|
|Contact details of provider:|| Postal: |
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.:
- 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.
- 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.
- Richard J. Gilbert and Marvin Lieberman., 1987. "Investment and Coordination in Oligopolistic Industries," Economics Working Papers 8730, University of California at Berkeley.
- Beth Allen & Raymond Deneckere & Tom Faith & Dan Kovenock, 1994.
"Capacity Precommitment as a Barrier to Entry:A Bertrand-Edgeworth Approach,"
9411002, EconWPA, revised 14 Nov 1994.
- Dan Kovenock & Raymond Deneckere & Tom Faith & Beth Allen, 2000. "Capacity precommitment as a barrier to entry: A Bertrand-Edgeworth approach," Economic Theory, Springer, vol. 15(3), pages 501-530.
- 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.
- 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.
- 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.
- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
- Dan Kovenock & Raymond J. Deneckere, 1996. "Bertrand-Edgeworth duopoly with unit cost asymmetry (*)," Economic Theory, Springer, vol. 8(1), pages 1-25.
- Pankaj Ghemawat, 1997. "Games Businesses Play: Cases and Models," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262071827, June.
- Bernstein, Jeffrey I., 1991.
"Price Margins and Capital Adjustment: Canadian Mill Products and Pulp and Paper Industries,"
91-42, C.V. Starr Center for Applied Economics, New York University.
- 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.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:red:sed009:106. See general information about how to correct material in RePEc.
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.