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Capacity Expansion Games with Application to Competition in Power Generation Investments

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Date
2017-11
Dewey
Economie industrielle
Sujet
Capacity expansion; Continuous-time games of timing; Non-zero-sum stopping games; Power generation investments
JEL code
C.C7.C73; D.D4.D43; L.L1.L11; L.L9.L94; Q.Q4.Q40
Journal issue
Journal of Economic Dynamics & Control
Volume
84
Publication date
11-2017
Article pages
31
Publisher
Elsevier
DOI
http://dx.doi.org/10.1016/j.jedc.2017.08.002
URI
https://basepub.dauphine.fr/handle/123456789/20083
Collections
  • LEDa : Publications
Metadata
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Author
Aïd, René
163511 Laboratoire d'Economie de Dauphine [LEDa]
Li, Liangchen
534729 Department of Statistics and Applied Probability, University of California, Santa Barbara [USCB]
Ludkovski, Michael
534729 Department of Statistics and Applied Probability, University of California, Santa Barbara [USCB]
Type
Article accepté pour publication ou publié
Abstract (EN)
We consider competitive capacity investment for a duopoly of two distinct producers. The producers are exposed to stochastically fluctuating costs and interact through aggregate supply. Capacity expansion is irreversible and modeled in terms of timing strategies characterized through threshold rules. Because the impact of changing costs on the producers is asymmetric, we are led to a nonzero-sum timing game describing the transitions among the discrete investment stages. Working in a continuous-time diffusion framework, we characterize and analyze the resulting Nash equilibrium and game values. Our analysis quantifies the dynamic competition effects and yields insight into dynamic preemption and over-investment in a general asymmetric setting. A case-study considering the impact of fluctuating emission costs on power producers investing in nuclear and coal-fired plants is also presented.

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