Capacity Expansion Games with Application to Competition in Power Generation Investments

41 Pages Posted: 25 Jan 2017

See all articles by René Aïd

René Aïd

Université Paris-Dauphine

Liangchen Li

University of California, Santa Barbara (UCSB)

Michael Ludkovski

University of California, Santa Barbara

Date Written: December 13, 2016

Abstract

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.

Keywords: Capacity Expansion; Continuous-time Games of Timing; Non-zero-sum Stopping Games; Power generation investments

Suggested Citation

Aid, Rene and Li, Liangchen and Ludkovski, Mike, Capacity Expansion Games with Application to Competition in Power Generation Investments (December 13, 2016). Available at SSRN: https://ssrn.com/abstract=2904911 or http://dx.doi.org/10.2139/ssrn.2904911

Rene Aid

Université Paris-Dauphine ( email )

Place du Maréchal de Lattre de Tassigny
Paris, 75016
France

Liangchen Li

University of California, Santa Barbara (UCSB) ( email )

Santa Barbara, CA 93106
United States

Mike Ludkovski (Contact Author)

University of California, Santa Barbara ( email )

Santa Barbara, CA 93106
United States

HOME PAGE: http://www.pstat.ucsb.edu/faculty/ludkovski

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