Fighting over Uncertain Demand: Investment Commitment versus Flexibility

Gerda Dewit and Dermot Leahy

Economics Department Working Paper Series from Department of Economics, National University of Ireland - Maynooth

Abstract: This paper examines the trade-off between strategic investment commitment and flexibility under oligopoly. Facing demand uncertainty, firms decide whether to commit to investment early or wait until the uncertainty as been resolved. Two endogenous timing games are considered which differ in their characterisation of commitment. We show how uncertainty, the cost of capital and cost differences between firms demarcate the equilibrium outcomes. It is shown that a lower cost firm will forego flexibility at higher uncertainty. The nature of commitment will determine whether and for which ranges of uncertainty and costs, leader-follower investment arises. A brief welfare analysis is provided.

Keywords: Uncertainty; Investment Commitment; Oligopoly; Action Commitment; Observable Delay. (search for similar items in EconPapers)
JEL-codes: D80 L13 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2001-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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