Anticipation in innovative investment under oligopolistic competition

The paper studies the firms' optimal investment behavior in a dynamic duopoly framework. Embodied technological progress means later generations are more productive. The resulting model is a differential game combined with a vintage capital goods structure. Since such a framework has not been analyzed before, existing concepts have to be modified. After deriving that our solution is time consistent, our numerical analysis first shows that a technological breakthrough generates equilibrium investment behavior that admits anticipation waves, which are enhanced by competition. Second, the shape of these anticipation waves depends on the age of the underlying capital good: for younger capital goods the upward peaks are more pronounced, whereas for older ones this holds for the downward peaks. Third, we show that if a firm is able to anticipate on future technological developments, this results in a higher market share in the long run.
KEYWORDS: Differential games; Embodied technological progress; Maximum principle; Optimal control theory; Vintage capital

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