Timing of Investment and Dynamic Pricing in Privatized Sectors.

Abstract

Firms in equipment-intensive sectors, where investment in production is performed at diminishing marginal cost, spend billions of dollars in equipment and production capacity. Typically, this expenditure is induced by either the replacement of existing equipment, which deteriorates with age and can result in higher operating costs and lower production capacity, or further investment, to benefit from any technological improvement embedded in new equipment. We identify the optimal price policy, and the ensuing optimal sequence of investment timing a privatized firm selects through time and compare them with choices made at the time when such a type of firm was under public-ownership.planning investment; dynamic programming; economic behavior; privatization