Production and risk management in a multi-period duopoly under demand uncertainty

This paper considers the corporate hedging and production decisions in a Cournot duopoly under demand uncertainty with (μ, σ)-preferences. We are the first to consider the duopoly under uncertainty with a hedging opportunity in a dynamic setting. The paper is concerned with the effects of the production and hedging decision on future interactions and on equilibrium in the duopoly. We show that firms indeed consider long-term ramifications of their decisions and thus models which only contemplate short-term utilities in a one period world neglect important repercussions. However, the sign of the effect on future decisions is ambiguous. Thus, future research should set the focus on dynamic settings when considering risk management questions in imperfect markets. In a multi-period setting with storage the separation theorem does not hold, but a variation of the full hedge theorem is valid.