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 un it 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 exogenous environment (level of exogenous demand, purchase cost of capacity, an d interest rate) on a firm's optimal behavior and competitive position . In particular, the experimental designs facilitate analysis of the i mpact of synergistic forces in the external environment. Lastly, the e ffect of different levels and forms of uncertainty associated with exo genous demand are explored.