DYNAMIC OLIGOPOLY WITH CAPACITY ADJUSTMENT COSTS

The literature on strategic investment emphasized the case of completely irreversible investment. This paper considers an oligopoly model in which investment is reversible and capacity is subject to adjustment costs. An n-player, linear-quadratic differential game is analyzed. Existence and characterization results for perfect equilibrium feedback strategies are provided. Feedback strategies provide incentives for each player to invest strategically so as to preempt subsequent expansion by rivals. A larger set of perfect equilibria is constructed by using memory-dependent trigger strategies. Equilibria of this type are shown to support joint-value maximization (for some initial states) and asymmetric steady states. © 1991.