Competition with Lumpy Investment
Richard Gilbert and
RAND Journal of Economics, 1984, vol. 15, issue 2, 197-212
In markets with increasing returns to scale in investment, competition will occur over both the amount and the timing of new capital construction. This article develops a theory of competition in markets with indivisible and irreversible investments. The consequences of competition depend on the strategies and information available to the competitors. If firms act as Nash competitors with binding contracts, revenues will exceed costs for any number of firms and otherwise identical firms will earn different profits. In the absence of binding contracts, competition over the timing of investment can completely dissipate profits in a subgame perfect equilibrium with two or more firms.
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