 On the strategic value of risk managementThomas-Olivier Léautier and Jean Rochet International Journal of Industrial Organization, 2014, vol. 37, issue C, 153-169 Abstract: This article examines how firms facing volatile input prices and holding some degree of market power in their product market link their risk management and their production or pricing strategies. This issue is relevant in many industries ranging from manufacturing to energy retailing, where firms that are rendered “risk averse” by financial frictions decide on and commit to their hedging strategies before their product market strategies. We find that commitment to hedging modifies the pricing and production strategies of firms. This strategic effect is channeled through the risk-adjusted expected cost, i.e., the expected marginal cost under the probability measure induced by shareholders' “risk aversion”. It has opposite effects depending on the nature of product market competition: commitment to hedging toughens quantity competition while it softens price competition. Finally, not committing to the hedging position can never be an equilibrium outcome: committing is always a best response to non-committing. In the Hotelling model, committing is a dominant strategy for all firms. Keywords: Risk management; Price and quantity competition (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:37:y:2014:i:c:p:153-169 DOI: 10.1016/j.ijindorg.2014.07.006 Access Statistics for this article International Journal of Industrial Organization is currently edited by P. Bajari, B. Caillaud and N. Gandal More articles in International Journal of Industrial Organization from Elsevier |
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