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The optimal behaviour of firms facing stochastic costs

  • Francesco Menoncin
  • Rosella Nicolini

This paper aims at assessing the optimal behavior of a firm facing stochastic costs of production. In an imperfectly competitive setting, we evaluate to what extent a firm may decide to locate part of its production in other markets different from which it is actually settled. This decision is taken in a stochastic environment. Portfolio theory is used to derive the optimal solution for the intertemporal profit maximization problem. In such a framework, splitting production between different locations may be optimal when a firm is able to charge different prices in the different local markets.

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File URL: http://research.barcelonagse.eu/tmp/working_papers/161.pdf
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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 161.

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Date of creation: Feb 2005
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Handle: RePEc:bge:wpaper:161
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  1. Masahisa Fujita & Jacques-Francois Thisse, 2003. "Globalization and the Evolution of the Supply Chain: who gains and who loses?," KIER Working Papers 571, Kyoto University, Institute of Economic Research.
  2. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-91, June.
  3. Banal-Estanol, Albert & Ottaviani, Marco, 2005. "Mergers with Product Market Risk," CEPR Discussion Papers 4831, C.E.P.R. Discussion Papers.
  4. Asplund, Marcus, 1995. "Risk-Averse Firms in Oligopoly," SSE/EFI Working Paper Series in Economics and Finance 69, Stockholm School of Economics, revised 21 Sep 1999.
  5. Keith Head & Thierry Mayer & John Ries, 2002. "Revisiting oligopolistic reaction: are decisions on foreign direct investment strategic complements?," Sciences Po publications info:hdl:2441/c8dmi8nm4pd, Sciences Po.
  6. Anne-Célia Disdier & Thierry Mayer, 2004. "How Different is Eastern Europe? Structure and determinants of location choices by French firms in Eastern and Western Europe," Working Papers 245489, Institut National de la Recherche Agronomique, France.
  7. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  8. Kim, Daesik & Santomero, Anthony M, 1988. " Risk in Banking and Capital Regulation," Journal of Finance, American Finance Association, vol. 43(5), pages 1219-33, December.
  9. Koehn, Michael & Santomero, Anthony M, 1980. " Regulation of Bank Capital and Portfolio Risk," Journal of Finance, American Finance Association, vol. 35(5), pages 1235-44, December.
  10. Devereux, Michael P. & Griffith, Rachel, 1998. "Taxes and the location of production: evidence from a panel of US multinationals," Journal of Public Economics, Elsevier, vol. 68(3), pages 335-367, June.
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