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Title: Planning capacity expansion under oligopoly : the case of the petrochemical industry
Author: Fayad, Marwan Abdallah
ISNI:       0000 0004 2743 4781
Awarding Body: Imperial College London
Current Institution: Imperial College London
Date of Award: 2007
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In its early stages of development, the petrochemical industry was characterised as being an innovative and R&D intensive industry, enjoying expanding markets and rapid growth, with high profits. By the 1970's the industry was already showing signs of maturity, with an increase in the number of players and slowing growth. Technology was becoming standardised, and the need to exploit economies of scale for new plants was the order of the day. This process continued in the 1980's and 1990's; rapid growth gave way to cyclical demand and the emergence of significant overcapacity. Industry profitability had become an issue. Concern about overcapacity and uncertainty about future demand precipitated a process of restructuring of the industry with changing roles for major players, merger activity, and consolidation. This thesis explores the relationship between overcapacity and the investment behaviour of firms, and the role of demand uncertainty. A dynamic capacity expansion model of the linear quadratic type is developed and formulated in a game theoretic framework for rival firms serving a single market, and producing a homogenous product. Price is endogenised as an inverse demand function, making the actions of the firms interdependent and capturing the interaction between them. The model allows for adjustment costs; in the empirical simulations economies of scale and learning effects are also accounted for. Initially formulated for a duopoly, the model is then extended to deal with an oligopoly. It is applied to the US styrene industry which serves as a proxy for the petrochemical industry. The industry is examined over a period of 23 years. Optimal control theory and dynamic programming techniques, are used to obtain optimal solutions, under different investment strategies, for investment and output rates of rival firms. The model performs well in explaining the evolution of industry capacity, production and prices, and most of the overcapacity over the study period. The investment behaviour of the major styrene producers is best described by a feed-back Nash-Cournot strategy, indicating that overcapacity can be attributed to strategic considerations. An examination of market developments also reveals that major US styrene producers invested strategically. Building larger plants to benefit from economies of scale, and increased integration of production operations contributed to raising entry barriers and the low levels of entry into the styrene industry. While uncertainty causes firms to increase their investment rate in this model, the simulation results show that industry overcapacity could not have been caused solely by concern about demand uncertainty.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available