Abstract
The theory of irreversible investment under uncertainty and the theory of competitive storage are combined in a rational expectations model of the price formation of industrial commodities. In continuous time, an endogenous price zone arises from the opening and closure of capacity at boundaries of the price zone. Dynamics of the price process within the price zone are determined by competitive speculation. The model is scaled to the dimensions of the aluminium market and solved numerically. Simulated prices and inventories exhibit characteristics similar to the real series: volatile prices, asymmetric adjustment of production to price changes and long inventory cycles.
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