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.
Strategic capacity choice with risk-averse firms
De Giovanni D.;Iakimova E.
2022-01-01
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.File in questo prodotto:
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