Capacity investment choices under cost heterogeneity and output flexibility in oligopoly

Benoît Chevalier-Roignant, Christoph M. Flath, Peter Kort and Lenos Trigeorgis

European Journal of Operational Research, 2021, vol. 290, issue 3, 1154-1173

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.

Keywords: Investment analysis; Real options; Capacity choices; Output flexibility; Firm asymmetry, (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:290:y:2021:i:3:p:1154-1173

DOI: 10.1016/j.ejor.2020.08.046

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