A Computable Dynamic Oligopoly Model of Capacity Investment

Gautam Gowrisankaran and Philipp Schmidt-Dengler

No 32399, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analyze a class of dynamic models that has several recent applications, where each period, each firm receives a private shock to the marginal cost of investment and chooses among many ordered capacity levels. Simulation methods to compute these models can result in non-existence of pure strategy equilibrium, while including multinomial shocks leads to counterintuitive predictions. We provide a computationally fast method to calculate optimal investment probabilities given value functions that iteratively finds investment levels chosen with positive probability and cutoffs of private information shocks across choices. Our method is useful to practitioners seeking to estimate models with continuous firm choices.

JEL-codes: C63 C73 L11 L13 (search for similar items in EconPapers)
Date: 2024-05
New Economics Papers: this item is included in nep-com, nep-cta, nep-gth and nep-ind
Note: IO
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Working Paper: A Computable Dynamic Oligopoly Model of Capacity Investment (2024)
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