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Capacity investment choices under cost heterogeneity and output flexibility in oligopoly

Author

Listed:
  • Benoit Chevalier-Roignant

    (EM - EMLyon Business School)

  • Christoph M. Flath

    (JMU - Julius-Maximilians-Universität Würzburg = University of Würzburg [Würsburg, Germany])

  • Peter M. Kort

    (University of Antwerp (Belgium, Antwerp))

  • Lenos Trigeorgis

    (UCY - University of Cyprus [Nicosia])

Abstract

We study capacity investment decisions among oligopoly firms under conditions of cost heterogeneity and output flexibility within capacity constraints. Output flexibility causes the value of the firm to be convex in the state of demand, which implies that the firm invests in larger capacity when the economic environment is more uncertain. Under cost heterogeneity among oligopoly firms, a lower-cost firm invests in larger capacity, while a less efficient rival chooses lower capacity as capacities are strategic substitutes. Consequently, higher uncertainty leads to more dispersion of equilibrium capacities and greater industry concentration. More competition thus induces a welfare loss when uncertainty and cost heterogeneity are high.

Suggested Citation

  • Benoit Chevalier-Roignant & Christoph M. Flath & Peter M. Kort & Lenos Trigeorgis, 2021. "Capacity investment choices under cost heterogeneity and output flexibility in oligopoly," Post-Print hal-05606690, HAL.
    • Handle: RePEc:hal:journl:hal-05606690
    DOI: 10.1016/j.ejor.2020.08.046
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    Cited by:

    1. Wei, Bin & Wang, Nengmin & He, Zhengwen & Wu, Harris, 2026. "Optimizing capacity investment and production planning in the presence of protective tariffs and market competition," European Journal of Operational Research, Elsevier, vol. 330(2), pages 473-486.
    2. Hongmei Li & Yingshuang Tan, 2024. "Timing and green decisions for competitive manufacturers under demand uncertainty and risk aversion," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 45(4), pages 2501-2515, June.
    3. Shao, Lingjie & Wu, Junle & Ma, Jinghan & Yu, Shengjie & Li, Mengsi, 2025. "Valuation and optimal operation of power investment projects with and without volume constraints under one-factor model," Energy, Elsevier, vol. 330(C).
    4. Yang, Liu & Ng, Chi To & Cheng, T.C.E. & Sun, Mingyao & Shao, Xuefeng & Li, Ruiqing, 2024. "Competition under demand uncertainty: The roles of technology and capacity strategy," European Journal of Operational Research, Elsevier, vol. 317(1), pages 185-204.
    5. Ebina, Takeshi & Matsushima, Noriaki & Nishide, Katsumasa, 2022. "Demand uncertainty, product differentiation, and entry timing under spatial competition," European Journal of Operational Research, Elsevier, vol. 303(1), pages 286-297.
    6. Zhang, Anzhou, 2024. "Capacity, volume flexibility, and costs," International Journal of Industrial Organization, Elsevier, vol. 97(C).

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