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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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 Contact details of provider: 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 Email: Web page: http://www.hhs.se/ More information through EDIRC
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Find related papers by JEL classification: D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Dixit, Avinash K, 1986.
"Comparative Statics for Oligopoly,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February.
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Baron, David P, 1971.
"Demand Uncertainty in Imperfect Competition,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 12(2), pages 196-208, June.
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Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
Suchan Chae & Paul Heidhues, 2003.
"Buyers’ Alliances for Bargaining Power,"
CIG Working Papers
SP II 2003-24, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
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