Dynamic Oligopolistic Competition between Innovating Firms

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The overall aim of this project is to develop and exploit a dynamic framework of analysis that allows studying the optimal investment strategies of oligopolistic firms under consideration of the uncertainty about future changes in the market structure. The considered changes in the market structure are due to changes in the range of products offered on the market triggered by product innovations of the firms in the market. As the ability to introduce new products is typically based on innovation effort of the innovating firm, such changes are endogenous results of firm strategies and industry dynamics. Therefore, there are important feedback effects between firm strategies on established markets (like capacity investments) and innovation strategies aiming at the introduction of new products that extend the product range. The main contribution of this project is to consider the effects of expected changes in the market structure on strategic behavior on established markets, as well as the feedback between capacity investments for established products and innovation efforts, in a dynamic game theoretic framework. Employing a combination of analytical and numerical methods the following main research questions will be addressed:¿ How does the perspective of the future introduction of additional (differentiated) products affect capacity investments of oligopolistic firms on established markets?¿ How are the capacity dynamics influenced by asymmetries with respect to innovation capabilities between competitors? ¿ How are incentives to invest in innovative activities influenced by (current) capacities for established products? ¿ How is the timing of the introduction of a new product influenced by (current) capacities for established products? ¿ How are (discounted) future profit streams affected by the size of capacities for the established markets? Under which circumstances might large capacities have negative implications for future profits?