Strategic capacity choice with risk-averse firms

Domenico De Giovanni and Elena Iakimova

Journal of the Operational Research Society, 2023, vol. 74, issue 4, 1166-1182

Abstract: We study the joint effect of uncertainty, competition, and risk-aversion on the optimal time and size of firms in a duopoly. As risk-aversion increases, the leader’s alternatives between deterring and accommodating the follower’s entry become equivalent. When the leader’s role is assigned exogenously, risk-aversion reduces equilibrium investment sizes and timing. In equilibrium, the leader is always the largest firm in the market. When the leader’s role is determined in equilibrium, risk-aversion delays the rent equalization point. At high levels of risk-aversion, both firms invest in the same capacity.

Date: 2023
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DOI: 10.1080/01605682.2022.2070036

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