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Endogenous Investment and Pricing under Uncertainty

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  • Young David

    (University of Auckland)

Abstract

I analyze investment and pricing incentives in a differentiated products framework with uncertain demand. Firms choose production capacities before observing demand and choose prices after demand is realized. Unlike previous models, when firms are identical, symmetric pure-strategy equilibria exist, even in the presence of very low capacity costs. The equilibrium outcomes are significantly different from the equivalent Cournot model. Firms choose to underutilize their capacity at times of low demand, and hold more capacity than predicted by Cournot. I show with a simple policy example that even the sign of the comparative statics may differ between the two models.

Suggested Citation

  • Young David, 2010. "Endogenous Investment and Pricing under Uncertainty," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-29, January.
    • Handle: RePEc:bpj:bejtec:v:10:y:2010:i:1:n:1
    DOI: 10.2202/1935-1704.1537
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    References listed on IDEAS

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    Cited by:

    1. Christiaan Behrens & Mark Lijesen, 2012. "Capacity Choice under Uncertainty with Product Differentiation," Tinbergen Institute Discussion Papers 12-113/VIII, Tinbergen Institute, revised 20 Feb 2014.
    2. Lenhard, Severin, 2022. "Imperfect competition with costly disposal," International Journal of Industrial Organization, Elsevier, vol. 82(C).

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