Irreversible investment under uncertainty in oligopoly

An oligopoly is studied where firms facing a stochastic inverse demand curve use capacity as strategic variable. Capacity may be adjusted continuously over time with linear cost. The analysis uses the technique of a fictitious social planner and the theory of irreversible investment under uncertainty. Examples indicate that qualitatively the price process will be similar in oligopoly and competitive equilibrium. When firms are nonidentical, e.g. in initial size, and even if they are alike in other respects, substantial time may pass until they are all the same size. Much of that time, one firm may dominate the market. (C) 1998 Elsevier Science B.V. All rights reserved.