Journal
JOURNAL OF ECONOMIC DYNAMICS & CONTROL
Volume 84, Issue -, Pages 1-31Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.jedc.2017.08.002
Keywords
Capacity expansion; Continuous-time games of timing; Non-zero-sum stopping games; Power generation investments
Categories
Funding
- Finance for Energy Markets Research Initiative
- ANR project CAESARS [ANR-15-CE05-0024]
- [NSF-CDSE 1521743]
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We consider competitive capacity investment for a duopoly of two distinct producers. The producers are exposed to stochastically fluctuating costs and interact through aggregate supply. Capacity expansion is irreversible and modeled in terms of timing strategies characterized through threshold rules. Because the impact of changing costs on the producers is asymmetric, we are led to a nonzero-sum timing game describing the transitions among the discrete investment stages. Working in a continuous-time diffusion framework, we characterize and analyze the resulting Nash equilibrium and game values. Our analysis quantifies the dynamic competition effects and yields insight into dynamic preemption and over-investment in a general asymmetric setting. A case-study considering the impact of fluctuating emission costs on power producers investing in nuclear and coal-fired plants is also presented. (C) 2017 Elsevier B.V. All rights reserved.
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