A Stationary Mean-Field Equilibrium Model of Irreversible Investment in a Two-Regime Economy

René Aïd (), Matteo Basei () and Giorgio Ferrari ()
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René Aïd: University Paris Dauphine, PSL Research University, 75016 Paris, France
Matteo Basei: EDF Lab Paris-Saclay, 91120 Palaiseau, France; and Finance for Energy Markets Research Centre, 75016 Paris, France
Giorgio Ferrari: Center for Mathematical Economics, Bielefeld University, Bielefeld 33615, Germany

Operations Research, 2025, vol. 73, issue 5, 2351-2374

Abstract: We consider a mean-field model of firms competing à la Cournot on a commodity market, where the commodity price is given in terms of a power inverse demand function of the industry-aggregate production. Investment is irreversible and production capacity depreciates at a constant rate. Production is subject to Gaussian productivity shocks, whereas large nonanticipated macroeconomic events driven by a two-state continuous-time Markov chain can change the volatility of the shocks, as well as the price function. Firms wish to maximize expected discounted revenues of production, net of investment, and operational costs. Investment decisions are based on the long-run stationary price of the commodity. We prove existence, uniqueness, and characterization of the stationary mean-field equilibrium of the model. The equilibrium investment strategy is of barrier type, and it is triggered by a couple of endogenously determined investment thresholds, one per state of the economy. We provide a quasi-closed form expression of the stationary density of the state, and we show that our model can produce Pareto distribution of firms’ size. This is a feature that is consistent both with observations at the aggregate level of industries and at the level of a particular industry. We provide evidence that persistent periods of economic downturn increase market concentration. We demonstrate that firms with slowly depreciating production capacities fare better in a stable, average economy, whereas firms with quickly depreciating assets can benefit from sequences of boom and bust.

Keywords: Financial; Engineering; mean-field stationary equilibrium; irreversible investment; regime-switching; market concentration; value of economic stability (search for similar items in EconPapers)
Date: 2025
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