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Fighting over Uncertain Demand: Investment Commitment versus Flexibility

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Author Info
Gerda Dewit
Dermot Leahy () (Department of Economics, Finance and Accounting, National University of Ireland, Maynooth, Ireland, Department of Economics, Finance and Accounting,University College Dublin, Belfield, Dublin 4.)

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Abstract

This paper examines the trade-off between strategic investment commitment and flexibility under oligopoly. Facing demand uncertainty, firms decide whether to commit to investment early or wait until the uncertainty as been resolved. Two endogenous timing games are considered which differ in their characterisation of commitment. We show how uncertainty, the cost of capital and cost differences between firms demarcate the equilibrium outcomes. It is shown that a lower cost firm will forego flexibility at higher uncertainty. The nature of commitment will determine whether and for which ranges of uncertainty and costs, leader-follower investment arises. A brief welfare analysis is provided.

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Publisher Info
Paper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n1060201.

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Length: 22 pages
Date of creation: Feb 2001
Date of revision:
Handle: RePEc:may:mayecw:n1060201

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Postal: Maynooth, Co. Kildare
Phone: 353-1-7083728
Fax: 353-1-7083934
Web page: http://www.may.ie/academic/economics/
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Related research
Keywords: Uncertainty; Investment Commitment; Oligopoly; Action Commitment; Observable Delay.;

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Find related papers by JEL classification:
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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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.:
  1. David Collie, 1994. "Endogenous timing in trade policy games: Should governments use countervailing duties?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 130(1), pages 191-209, March. [Downloadable!] (restricted)
  2. Hamilton, Jonathan H. & Slutsky, Steven M., 1990. "Endogenous timing in duopoly games: Stackelberg or cournot equilibria," Games and Economic Behavior, Elsevier, vol. 2(1), pages 29-46, March. [Downloadable!] (restricted)
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  3. Julia Darby & Andrew Hughes Hallett & Jonathan Ireland & Laura Piscitelli, . "The Impact of Exchange Rate Uncertainty on the Level of Investment," ICMM Discussion Papers 49, Department of Economics University of Strathclyde.
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  4. Hassett, Kevin A & Metcalf, Gilbert E, 1999. "Investment with Uncertain Tax Policy: Does Random Tax Policy Discourage Investment?," Economic Journal, Royal Economic Society, vol. 109(457), pages 372-93, July. [Downloadable!] (restricted)
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  5. Elie Appelbaum & Chin Lim, 1985. "Contestable Markets under Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 28-40, Spring. [Downloadable!] (restricted)
  6. Steve Dowrick, 1986. "von Stackelberg and Cournot Duopoly: Choosing Roles," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 251-260, Summer. [Downloadable!] (restricted)
  7. Dewit, Gerda & Leahy, Dermot, 2004. "Rivalry in uncertain export markets: commitment versus flexibility," Journal of International Economics, Elsevier, vol. 64(1), pages 195-209, October. [Downloadable!] (restricted)
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  8. Sadanand, Asha & Sadanand, Venkatraman, 1996. "Firm Scale and the Endogenous Timing of Entry: a Choice between Commitment and Flexibility," Journal of Economic Theory, Elsevier, vol. 70(2), pages 516-530, August. [Downloadable!] (restricted)
  9. Gal-Or, Esther, 1985. "First Mover and Second Mover Advantages," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 649-53, October. [Downloadable!] (restricted)
  10. Marcel Boyer & Michel Moreaux, 1997. "Capacity Commitment versus Flexibility," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 6(1), pages 347-376, 06. [Downloadable!] (restricted)
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  11. Spencer, Barbara J. & Brander, James A., 1992. "Pre-commitment and flexibility : Applications to oligopoly theory," European Economic Review, Elsevier, vol. 36(8), pages 1601-1626, December. [Downloadable!] (restricted)
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  1. Gerda Dewit & Dermot Leahy, 2001. "Rivalry In Uncertain Export Markets: Commitment Versus Flexibility," Economics, Finance and Accounting Department Working Paper Series n1050201, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth. [Downloadable!]
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