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Optimal Capacity Adjustment by a Multiplant Firm

Author

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  • Michele Moretto

    (University of Padova and Fondazione Eni Enrico Mattei)

Abstract

The paper studies the effect of scale economies on the optimal capacity adjustment of a mutiplant firm. It is shown that with increasing economies of scale plants are ranked in decreasing order, after which the optimal choice is to scrap the largest one. On the contrary, if there are decreasing economies of scale the optimal policy would be to wait before abandoning intermediate plants. That is, decreasing economies of scale amplify the effect of uncertainty on disinvestment and tend to increase the plant's life.

Suggested Citation

  • Michele Moretto, 1999. "Optimal Capacity Adjustment by a Multiplant Firm," Working Papers 1999.28, Fondazione Eni Enrico Mattei.
  • Handle: RePEc:fem:femwpa:1999.28
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    File URL: http://www.feem.it/userfiles/attach/Publication/NDL1999/NDL1999-028.pdf
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    Cited by:

    1. Michele Moretto & Gianpaolo Rossini, 2007. "Partnerships vs. Firms Entry Strategies," "Marco Fanno" Working Papers 0049, Dipartimento di Scienze Economiche "Marco Fanno".
    2. Michele Moretto & Gianpaolo Rossini, "undated". "Start-up entry strategies: Employer vs. Nonemployer firms," Working Papers ubs0409, University of Brescia, Department of Economics.

    More about this item

    Keywords

    Exit; Option value; Irreversibility;

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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