The Dynamics of Firms in the Presence of Adjustment Costs
AbstractIn this paper we investigate how capacity adjustment costs affect a firm¡¯s response to demand uncertainty. We first characterize the pattern of optimal capacity adjustment for a monopolistic firm and find that capacity behaves as a stabilizer for the firm¡¯s output. For duopolistic firms the pattern is similar. However, a firm may deviate depending on the demand and capacity circumstance. We find that when there is only a small cost of adjustment, a firm has more incentive to deviate at a larger capacity. We also derive conditions under which deviation in the high-demand state (regardless of present capacity) is more profitable. The case of zero adjustment costs is also discussed.
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Bibliographic InfoArticle provided by Society for AEF in its journal Annals of Economics and Finance.
Volume (Year): 2 (2001)
Issue (Month): 2 (November)
Capacity; Adjustment costs; Monopoly; Duopoly; Collusion;
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- L00 - Industrial Organization - - General - - - General
- E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
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