Promoting Capital Improvements by Public Utilities: A Supergame Approach
A public utility undertakes capital improvements only if it expects to earn revenues that cover necessary investments and provide a competitive return. Typically, outlays occur within a short span of time while the returns are spread over a much longer period. This applies to expenditures for cost-reducing investments, capacity expansion, or product enhancements. It is especially true of utilities that adopt new technologies such as the latest advances in telecommunications networks.
KeywordsCapital Stock Consumer Surplus Planning Solution Subgame Perfect Equilibrium Capacity Expansion
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