Uncertainty and the acquisition of capacity: A competitive analysis

Motivated by experience with the telecommunications industry, analysis of a dynamic game approach to price competition is undertaken. In the underlying model, two firms competing for demand determine the amount of new capacity to be acquired which has the effect of reducing the unit cost of production and thereby the price charged for output. Using a factorial experimental design approach, policy oriented results are obtained which explore the effects of several factors in the exogeneous environment (level of exogeneous demand, purchase cost of capacity, and interest rate) on a firm’s optimal behavior and competitive position. In particular, the experimental designs facilitate analysis of the impact of synergistic forces in the external environment. Lastly, the effect of different levels and forms of uncertainty associated with exogeneous demand are explored.