A Computable Dynamic Oligopoly Model of Capacity Investment
We consider widely used dynamic models where every period, each agent receives a private information shock to investment marginal cost and chooses among many ordered investment levels. We provide a computationally fast method to calculate optimal investment probabilities given value functions. Our method finds shock cutoffs between investment choices, accounting for the possibility that some levels are dominated. Other methods to compute these models may result in non-existence of pure strategy equilibrium or only work under restrictive assumptions. Multinomial logit models with choice-specific shocks can lead to counterintuitive predictions. Our method is useful to researchers estimating dynamic models of investment.
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Copy CitationGautam Gowrisankaran and Philipp Schmidt-Dengler, "A Computable Dynamic Oligopoly Model of Capacity Investment," NBER Working Paper 32399 (2024), https://doi.org/10.3386/w32399.Download Citation
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