Industrial capacity planning in oligopolistic markets

Available productive capacity is determinant of a company’s success once it allows meeting the current and future demand. This article proposes a quantitative model for determining long-term productive capacity in competitive oligopolistic markets, based on the Nash Equilibrium formulated as a Variational Inequality problem. Numerical examples enable an analytical evaluation of the economic equilibrium’s sensitivity to marginal costs, investment costs, hurdle rate, and market saturation. Results show that, in order to achieve a greater market share, it is important to adopt strategies that reduce marginal costs. On the other hand, variations in the hurdle rate may or may not reinforce the position of a competitor in the market and his interest in investing in capacity expansion. Additionally, market saturation may be achieved, beyond which investment becomes unattractive. Each of these is a positive outcome for society, triggering diversified investments and competition in economic sectors where competition is low and profits are high.