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Uncertainty, Capacity and Flexibility: the Monopoly Case

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  • Marcel BOYER
  • Michel MOREAUX

Abstract

It is generally expected that profit maximisation leads a firm to choose a more flexible plant the more uncertain its demand function is and/or the more variable is the sequence of quantities to produce. In this paper we make explicit the precise conditions under which this intuitive argument is valid. We show that a sufficient condition is that the increase in uncertainty must involve only those states of demand for which the firm is initially active, that is for which it is able to cover quasi-fixed and variable costs. These are common assumptions in most flexibility choice models. But we also show that a reverse relation between the variability in demand and plant flexibility may exist under reasonable cost and demand conditions, even under the most common definition of increased uncertainty in demand and the most acceptable notion of plant flexibility. We give an example of such an inverse relation.

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Bibliographic Info

Article provided by ENSAE in its journal Annals of Economics and Statistics.

Volume (Year): (1989)
Issue (Month): 15-16 ()
Pages: 291-313

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Handle: RePEc:adr:anecst:y:1989:i:15-16:p:13

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Cited by:
  1. Guy Meunier & Jean-Pierre Ponssard, 2013. "Capacity decisions with demand fluctuations and carbon leakage," Working Papers hal-00347650, HAL.
  2. Marcel Boyer & Séverine Clamens, 1997. "Strategic Adoption of a New Technology under Uncertain Implementation," CIRANO Working Papers 97s-40, CIRANO.
  3. Boyer, Marcel, 1996. "L’économie des organisations," L'Actualité Economique, Société Canadienne de Science Economique, vol. 72(3), pages 247-274, septembre.
  4. BOYER, Marcel & MOREAUX, Michel, 1995. "Capacity Commitment Versus Flexibility: The Technological Choice Nexus in a Strategic Context," Cahiers de recherche 9556, Universite de Montreal, Departement de sciences economiques.
  5. Kjersti-Gro Lindquist, 1998. "The Response by the Norwegian Aluminium Industry to Changing Market Structure," Discussion Papers 237, Research Department of Statistics Norway.
  6. Marcel Boyer, 1997. "L'économie des organisations : Mythes et réalités," CIRANO Working Papers 97s-02, CIRANO.
  7. Boyer, Marcel & Robert, Jacques, 2006. "Organizational inertia and dynamic incentives," Journal of Economic Behavior & Organization, Elsevier, vol. 59(3), pages 324-348, March.
  8. Martimort, David & Straub, Stéphane, 2012. "How to Design Infrastructure Contracts in a Warming World? A Critical Appraisal of Public-Private Partnerships," IDEI Working Papers 724, Institut d'Économie Industrielle (IDEI), Toulouse.
  9. Boyer, Marcel & Moreaux, Michel, 2000. "Flexibilité et stratégies d’impartition," L'Actualité Economique, Société Canadienne de Science Economique, vol. 76(2), pages 199-224, juin.
  10. Marcel Boyer & Jacques Robert, 1996. "Ex Ante Incentives and Ex Post Flexibility," CIRANO Working Papers 96s-14, CIRANO.
  11. David Martimort & Stéphane Straub, 2011. "How to Design Public-Private Partnerships in a Warming World? - When Infrastructure Becomes a Really “Hot” Topic," Working Papers 2011/25, Maastricht School of Management.

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