The Dynamics of Firms in the Presence of Adjustment Costs

Ruqu Wang ()

Annals of Economics and Finance, 2001, vol. 2, issue 2, 353-377

Abstract: In this paper we investigate how capacity adjustment costs affect a firm¡¯s response to demand uncertainty. We first characterize the pattern of optimal capacity adjustment for a monopolistic firm and find that capacity behaves as a stabilizer for the firm¡¯s output. For duopolistic firms the pattern is similar. However, a firm may deviate depending on the demand and capacity circumstance. We find that when there is only a small cost of adjustment, a firm has more incentive to deviate at a larger capacity. We also derive conditions under which deviation in the high-demand state (regardless of present capacity) is more profitable. The case of zero adjustment costs is also discussed.

Keywords: Capacity; Adjustment costs; Monopoly; Duopoly; Collusion (search for similar items in EconPapers)
JEL-codes: E20 L00 (search for similar items in EconPapers)
Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2001:v:2:i:2:p:353-377

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