Capacity investment choices under cost heterogeneity and output flexibility in oligopoly

Benoit Chevalier-Roignant (), Christoph M. Flath, Peter M. Kort and Lenos Trigeorgis
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Benoit Chevalier-Roignant: EM - EMLyon Business School
Christoph M. Flath: JMU - Julius-Maximilians-Universität Würzburg = University of Würzburg [Würsburg, Germany]
Peter M. Kort: University of Antwerp (Belgium, Antwerp)
Lenos Trigeorgis: UCY - University of Cyprus [Nicosia]

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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: Firm asymmetry; Investment analysis; Real options; Capacity choices; Output flexibility (search for similar items in EconPapers)
Date: 2021-05-01
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Published in European Journal of Operational Research, 2021, 290 (3), pp.1154 - 1173. ⟨10.1016/j.ejor.2020.08.046⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05606690

DOI: 10.1016/j.ejor.2020.08.046

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