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The Dynamics of Firms in the Presence of Adjustment Costs

Author

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  • Ruqu Wang

    () (Economics Department, Queen¡¯s University)

Abstract

In this paper we investigate how capacity adjustment costs affect a firm¡¯s response to demand uncertainty. We first characterize the pattern of optimal capacity adjustment for a monopolistic firm and find that capacity behaves as a stabilizer for the firm¡¯s output. For duopolistic firms the pattern is similar. However, a firm may deviate depending on the demand and capacity circumstance. We find that when there is only a small cost of adjustment, a firm has more incentive to deviate at a larger capacity. We also derive conditions under which deviation in the high-demand state (regardless of present capacity) is more profitable. The case of zero adjustment costs is also discussed.

Suggested Citation

  • Ruqu Wang, 2001. "The Dynamics of Firms in the Presence of Adjustment Costs," Annals of Economics and Finance, Society for AEF, vol. 2(2), pages 353-377, November.
  • Handle: RePEc:cuf:journl:y:2001:v:2:i:2:p:353-377
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    More about this item

    Keywords

    Capacity; Adjustment costs; Monopoly; Duopoly; Collusion;

    JEL classification:

    • L00 - Industrial Organization - - General - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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