In this paper, we study the determinants of dynamic investment and pricing policy of the imperfectly competitive firm.
Our model of the firm is based on the model formulated by Uzawa in [5], the most prominent feature of which is the "Penrose function" (adjustment costs), but different from his in some points. In particular, we assume, unlike Uzawa, a fixed coefficients technology to analyse "the problem of excess capacity."
It is proved that optimal policy exists uniquely under static expectations with respect to the future values of parameters and some other weak assumptions. The features of optimal solution are entirely different according to whether growth rate of demand (denoted by θ) is high (positive) or not (negative). If θ is high (low), the firm will grow in the long-run at the rate of θ (higher than θ) and may wish to hold excess capacity transitorily (permanently). Optimal price is constant during the periods when excess capacity is held.
Some comparative dynamic analyses are performed with respect to changes of parameters (prime costs, discount rate, θ and so on). The results of analyses are different according to θ being high or not, too.
Finally, the case of no adjustment costs (linear "Penrose function") is analysed in our model and compared with above results.
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