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Capacity expansion games with application to competition in power generation investments

René Aïd, Liangchen Li and Michael Ludkovski

Journal of Economic Dynamics and Control, 2017, vol. 84, issue C, 1-31

Abstract: 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.

Keywords: Capacity expansion; Continuous-time games of timing; Non-zero-sum stopping games; Power generation investments (search for similar items in EconPapers)
JEL-codes: C73 D43 L11 L94 Q40 (search for similar items in EconPapers)
Date: 2017
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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