The role of Capacity Building on Technology Adoption Under Imperfect Competition

This work studies the investment choice of firms in a two-period model when there are two different productive capacities that embody two different types of technology. One of them is more efficient (allowing to produce at a lower marginal cost), but more expensive to purchase. Firms face a financial constraint which limits their first period growth. By investing in the capacity using inefficient technology, firms grow faster but face a higher production cost in both periods. The equilibrium behavior is then to invest in a mixture of both types of capacity. This stands in contrast with the literature on technology adoption. Furthermore, under duopoly competition, there exists a symmetric equilibrium and two asymmetric equilibria with preemption, in which one of the firms overinvests in the inefficient capacity to gain a size advantage, whereas its opponent concentrates on efficient capacity. Finally, we find a counter-intuitive policy result: an increase in the purchasing price of inefficient capacity may increase its us