Capacity Investment, Preemption and Commitment in an Infinite Horizon Model

Stanley S Reynolds

International Economic Review, 1987, vol. 28, issue 1, 69-88

Abstract: The commitment value of capacity is analyzed in an infinite horizon duopoly model. The paper focuses on the role of alternative behavioral assumptions about the ability of firms to commit to investment paths. Each firm's investment strategy in a feedback Nash equilibrium is shown to be a decreasing function of its rival's current capacity. This creates an incentive for a firm to expand its capacity to preempt subsequent rival investment. In a precommitment equilibrium there are no incentives to invest preemptively. As a consequence, steady state capacity levels are greater in a feedback Nash equilibrium than in a precommitment equilibrium. Copyright 1987 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1987
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