Numerical Solution of Dynamic Oligopoly Games with Capacity Constraints

This paper discusses how numerical techniques may be used to solve the simultaneous functional equations that arise in dynamic stochastic games. Unlike the conventional linear-quadratic approach, our methods may be used to address general model specifications including non-quadratic objective functions, non-linear equations of motion, and constraints on decision variables. As an illustration, we apply our methods to a dynamic duopoly game in which competing firms face short-run production capacity constraints that can be relaxed through higher investment in capital stock.