Capacity investment choices under cost heterogeneity and output flexibility in oligopoly
Chevalier-Roignant,BenoƮt Flath,Christoph M. Kort,Peter M. Trigeorgis,Lenos
Chevalier-Roignant,BenoƮt
Flath,Christoph M.
Kort,Peter M.
Trigeorgis,Lenos
Abstract
We study capacity investment decisions among oligopoly firms under conditions of cost heterogeneity and output flexibility within capacity constraints. Output flexibility causes the value of the firm to be convex in the state of demand, which implies that the firm invests in larger capacity when the economic environment is more uncertain. Under cost heterogeneity among oligopoly firms, a lower-cost firm invests in larger capacity, while a less efficient rival chooses lower capacity as capacities are strategic substitutes. Consequently, higher uncertainty leads to more dispersion of equilibrium capacities and greater industry concentration. More competition thus induces a welfare loss when uncertainty and cost heterogeneity are high.
Description
Funding Information: The authors are thankful to participants at the International Real Options conference, at the YARO Workshop and at the CEFRA Seminar (EMLYON) as well as to Herbert Dawid, Marco A.G. Dias, Kuno Huisman, Bart Lambrecht, Dean Paxson, Robert Pindyck, Richard Ruble, Jacco Thijssen, and Bruno Versaevel for generous comments.
Date
2021-05
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Publisher
Research Projects
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Keywords
Capacity choices, Firm asymmetry, Investment analysis, Output flexibility, Real options
Citation
Chevalier-Roignant, B, Flath, C M, Kort, P M & Trigeorgis, L 2021, 'Capacity investment choices under cost heterogeneity and output flexibility in oligopoly', European Journal of Operational Research, vol. 290, no. 3, pp. 1154-1173. https://doi.org/10.1016/j.ejor.2020.08.046