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A Model of Multiproduct Firm Growth

Author

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  • Bingchao Huangfu

    (Institute for Social and Economic Research, Nanjing Audit University, P. R. China)

Abstract

This paper studies optimal growth strategies of a multiproduct firm that invests in the qualities of different products, which have persistent effects on future payoffs and are modeled as a state variable of a stochastic game. We derive a unique Markov perfect equilibrium under a monotonicity condition. At the early stage, the firm focuses on the product with higher quality, and may switch its specialization. If the quality of the specialized good is high enough, the firm diversifies to capture demands for all products. However, the firm may lose its focus on either product and get no demand, due to a moral hazard problem.

Suggested Citation

  • Bingchao Huangfu, 2021. "A Model of Multiproduct Firm Growth," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 23(01), pages 1-29, March.
    • Handle: RePEc:wsi:igtrxx:v:23:y:2021:i:01:n:s0219198920500127
    DOI: 10.1142/S0219198920500127
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    More about this item

    Keywords

    Firm dynamics; stochastic games; Markov perfect equilibrium; specialization; diversification; moral hazard;
    All these keywords.

    JEL classification:

    • B21 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Microeconomics
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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