Lumpy Capacity Investment and Disinvestment Dynamics

Capacity addition and withdrawal decisions are among the most important strategic decisions made by …rms in oligopolistic industries. In this paper, we develop and analyze a fully dynamic model of an oligopolistic industry with lumpy capacity and lumpy investment/disinvestment. We use our model to answer two questions. First, what economic factors facilitate preemption races? Second, what economic factors facilitate capacity coordination? We show that low product di¤erentiation, low investment sunkness, and high depreciation promote preemption races. We also show that low product di¤erentiation and low investment sunkness promote capacity coordination. Although depreciation removes capacity, it may impede capacity coordination. Finally, we show that, at least over some range of parameter values, …rms’expectation plays a key role in determining whether or not industry dynamics are characterized by preemption races and capacity coordination. Taken together, our results suggest t...

• Type: Journal
• Year: 2010
• Where: IOR
• Authors: David Besanko, Ulrich Doraszelski, Lauren Xiaoyuan Lu, Mark Satterthwaite
• Keywords: Capacity Coordination, IOR 2010, Low Investment Sunkness, Preemption Races