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Uncertainty, Capacity and Flexibility: the Monopoly Case

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  • Boyer, M.
  • Moreaux, A.

Abstract

It is generally expected that profit maximisation leads a firm to choose a more flexible plant the more uncertain its demand function is and/or the more variable is the sequence of quantities to produce. In this paper we make explicit the precise conditions under which this intuitive argument is valid. We show that a sufficient condition is that the increase in uncertainty must involve only those states of demand for which the firm is initially active, that is for which it is able to cover quasi-fixed and variable costs. These are common assumptions in most flexibility choice models. But we also show that a reverse relation between the variability in demand and plant flexibility may exist under reasonable cost and demand conditions, even under the most common definition of increased uncertainty in demand and the most acceptable notion of plant flexibility. We give an example of such an inverse relation.

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Bibliographic Info

Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 8911.

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Length: 34P. pages
Date of creation: 1989
Date of revision:
Handle: RePEc:mtl:montde:8911

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Keywords: Biens D'equiment ; Incertitude ; Monoles;

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Cited by:
  1. BOYER, Marcel & MOREAUX, Michel, 1995. "Capacity Commitment Versus Flexibility: The Technological Choice Nexus in a Strategic Context," Cahiers de recherche 9556, Universite de Montreal, Departement de sciences economiques.
  2. Marcel Boyer, 1997. "L'économie des organisations : Mythes et réalités," CIRANO Working Papers 97s-02, CIRANO.
  3. Boyer, Marcel & Robert, Jacques, 2006. "Organizational inertia and dynamic incentives," Journal of Economic Behavior & Organization, Elsevier, vol. 59(3), pages 324-348, March.
  4. Guy Meunier & Jean-Pierre Ponssard, 2013. "Capacity decisions with demand fluctuations and carbon leakage," Working Papers hal-00347650, HAL.
  5. Kjersti-Gro Lindquist, 1998. "The Response by the Norwegian Aluminium Industry to Changing Market Structure," Discussion Papers 237, Research Department of Statistics Norway.
  6. Boyer, Marcel & Moreaux, Michel, 2000. "Flexibilité et stratégies d’impartition," L'Actualité Economique, Société Canadienne de Science Economique, vol. 76(2), pages 199-224, juin.
  7. Thierry LAFAY, 2011. "A Competitive Duopoly where Information Spillovers can be Mutually Advantageous," Discussion Papers (REL - Recherches Economiques de Louvain) 2011014, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  8. Martimort, David & Straub, Stéphane, 2012. "How to Design Infrastructure Contracts in a Warming World? A Critical Appraisal of Public-Private Partnerships," IDEI Working Papers 724, Institut d'Économie Industrielle (IDEI), Toulouse.
  9. Boyer, Marcel, 1996. "L’économie des organisations," L'Actualité Economique, Société Canadienne de Science Economique, vol. 72(3), pages 247-274, septembre.
  10. Marcel Boyer & Séverine Clamens, 1997. "Strategic Adoption of a New Technology under Uncertain Implementation," CIRANO Working Papers 97s-40, CIRANO.
  11. Marcel Boyer & Jacques Robert, 1996. "Ex Ante Incentives and Ex Post Flexibility," CIRANO Working Papers 96s-14, CIRANO.
  12. David Martimort & Stéphane Straub, 2011. "How to Design Public-Private Partnerships in a Warming World? - When Infrastructure Becomes a Really “Hot” Topic," Working Papers 2011/25, Maastricht School of Management.

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