Anticipation in innovative investment under oligopolistic competition

We study firms' optimal investment behavior in a dynamic duopoly framework. Embodied technological progress makes later generations more productive. The resulting model is a differential game combined with a vintage capital goods structure. Since such a framework has not been analyzed before, existing concepts have to be modified. Our numerical analysis first shows that a technological breakthrough generates equilibrium investment behavior that admits anticipation waves enhanced by competition. Second, the shape of these anticipation waves depends on the age of the underlying capital good: for younger capital goods the upward peaks are more pronounced, whereas for older ones this holds for the downward peaks. Third, we show that if a firm is able to anticipate on future technological developments, this results in a higher market share in the long run.