Optimal Capacity Adjustment by a Multiplant Firm

Michele Moretto

No 1999.28, Working Papers from Fondazione Eni Enrico Mattei

Abstract: The paper studies the effect of scale economies on the optimal capacity adjustment of a mutiplant firm. It is shown that with increasing economies of scale plants are ranked in decreasing order, after which the optimal choice is to scrap the largest one. On the contrary, if there are decreasing economies of scale the optimal policy would be to wait before abandoning intermediate plants. That is, decreasing economies of scale amplify the effect of uncertainty on disinvestment and tend to increase the plant's life.

Keywords: Exit; Option value; Irreversibility (search for similar items in EconPapers)
JEL-codes: D92 L11 (search for similar items in EconPapers)
Date: 1999-03
New Economics Papers: this item is included in nep-ind and nep-mic
References: Add references at CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:1999.28

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