Capacity Expansion Games with Application to Competition in Power Generation Investments


R. Aid, L. Li, M. Ludkovski

We consider competitive capacity investment for a duopoly of two distinct producers. The producers
are exposed to stochastically uctuating 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 nonzerosum
timing game describing the transitions among the discrete investment stages. Working in a
continuous-time di usion framework, we characterize and analyze the resulting Nash equilibrium
and game values. Our analysis quanti es the dynamic competition e ects and yields insight into
dynamic preemption and over-investment in a general asymmetric setting. A case-study considering
the impact of uctuating emission costs on power producers investing in nuclear and coal- red plants
is also presented.

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