Group for Research in Decision Analysis

The role of capacity building on technology adoption under imperfect competition

Thomas Fagart Paris School of Economics, France

This work studies the investment choice of firms in a two-period model when there are two different productive capacities that embody two different types of technology. One of them is more efficient (allowing to produce at a lower marginal cost), but more expensive to purchase. Firms face a financial constraint, which limits their first period growth. By investing in the capacity using inefficient technology, firms grow faster but face a higher production cost in both periods. The equilibrium behavior is then to invest in a mixture of both types of capacity. This stands in contrast with the literature on technology adoption. Furthermore, under duopoly competition, there exists a symmetric equilibrium and two asymmetric equilibria with preemption, in which one of the firms overinvests in the inefficient capacity in order to gain a size advantage, whereas its opponent concentrates on efficient capacity. Finally, we find a counter-intuitive policy result: an increase in the purchasing price of inefficient capacity may increase its use.

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