Program in Applied Mathematics Colloquium

We model dynamic competition in which firms make initial capital investment decisions followed by repeated entry and exit choices as demand fluctuates. We show a correspondence between competitive equilibrium and the solution to a planner’s problem, which establishes equilibrium existence and provides a platform for computation. We apply the model to analyze electricity generator investment decisions, incorporating fossil-fuel generator startup costs as the entry/exit friction. Market frictions are particularly important when evaluating grid-integration of renewables and renewable energy policies. The presence of startup costs reduces wind turbine profits, leading to as much as 60% lower uptake of wind investment for a given renewable subsidy level.