Capacity Expansion Games with Application to Competition in Power Generation Investments

• DOI: 10.2139/ssrn.2904911
• Publication Date: 2017-06-28T15:34:20Z
• Authors: Renn AAd; Liangchen Li; Michael Ludkovski
• Keywords: L.L9.L94; 330; 0211 other engineering and technologies; 02 engineering and technology; 338; JEL: Q - Agricultural and Natural Resource Economics • Environmental and Ecological Economics/Q.Q4 - Energy/Q.Q4.Q40 - General; Non-zero-sum stopping games; 01 natural sciences; 7. Clean energy; Capacity expansion; Q.Q4.Q40; Economie industrielle; 0101 mathematics; JEL: C - Mathematical and Quantitative Methods/C.C7 - Game Theory and Bargaining Theory/C.C7.C73 - Stochastic and Dynamic Games • Evolutionary Games • Repeated Games; D.D4.D43; [QFIN]Quantitative Finance [q-fin]; Continuous-time games of timing; JEL: L - Industrial Organization/L.L9 - Industry Studies: Transportation and Utilities/L.L9.L94 - Electric Utilities; C.C7.C73; JEL: D - Microeconomics/D.D4 - Market Structure, Pricing, and Design/D.D4.D43 - Oligopoly and Other Forms of Market Imperfection; L.L1.L11; Power generation investments; JEL: L - Industrial Organization/L.L1 - Market Structure, Firm Strategy, and Market Performance/L.L1.L11 - Production, Pricing, and Market Structure • Size Distribution of Firms

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 modeled in terms timing strategies characterized threshold rules. Because the impact changing on asymmetric, we led nonzero-sum game describing transitions among discrete stages. Working continuous-time diffusion framework, characterize analyze resulting Nash equilibrium values. Our analysis quantifies dynamic competition effects yields insight into preemption over-investment general asymmetric setting. A case-study considering emission power investing nuclear coal-fired plants also presented.