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Risk-Averse Firms in Oligopoly

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  • Asplund, Marcus

    (Dept. of Economics, Stockholm School of Economics)

Abstract

Does risk aversion lead to softer or fiercer competition? To give a complete answer, I provide a framework that can accommodate a wide range of alternative assumptions regarding the nature of competition and types of uncertainty. I show how more risk aversion will influence a firm's best response strategies, and that competition is unambiguously softer only in case of marginal cost uncertainty. In contrast to risk neutrality, the best response strategies depend on the level of fixed costs. This fact is extended to cover strategic investment models, and to analyse the importance of accumulated profits. I conclude by a discussion of how it is possible to test for risk-averse behaviour in oligopoly by conditioning on the type of uncertainty.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 69.

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Length: 35 pages
Date of creation: Sep 1995
Date of revision: 21 Sep 1999
Publication status: Forthcoming in International Journal of Industrial Organization.
Handle: RePEc:hhs:hastef:0069

Note: Previous title: Oligopoly and Risk Aversion
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Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Phone: +46-(0)8-736 90 00
Fax: +46-(0)8-31 01 57
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Web page: http://www.hhs.se/
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Keywords: Oligopoly; risk aversion; fixed costs; strategic investment; second order stochastic dominance; background risk; market risk;

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References

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