Capacity Choice under Uncertainty: The Impact of Market Structure

Veronika Grimm () and Gregor Zoettl

No 23, Working Paper Series in Economics from University of Cologne, Department of Economics

Abstract: We analyze a market game where firms choose capacities under uncertainty about future market conditions and make output choices after uncertainty has unraveled. We show existence and uniqueness of equilibrium under imperfect competition and provide an intuitive characterization of equilibrium investment. We show that investment in oligopoly, in the first and second best solution can be unambiguously ranked, in particular investment incentives are highest in the First Best solution and lowest under imperfect competition. We finally demonstrate that intervention of a social planer only at the production stage leads to strategic uncertainty at the investment stage and moreover decreases total investment below the level obtained under imperfect competition.

Keywords: Investment incentives; demand uncertainty; cost uncertainty; Cournot competition; First Best; Second Best; capacity obligations; spot market regulation (search for similar items in EconPapers)
JEL-codes: D41 D42 D43 D81 L13 (search for similar items in EconPapers)
Date: 2006-02-28
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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