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Fighting over Uncertain Demand: Investment Commitment versus Flexibility

  • Gerda Dewit
  • Dermot Leahy

    ()

    (Department of Economics, National University of Ireland, Maynooth, Ireland
    Department of Economics,University College Dublin, Belfield, Dublin 4.)

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    This paper examines the trade-off between strategic investment commitment and flexibility under oligopoly. Facing demand uncertainty, firms decide whether to commit to investment early or wait until the uncertainty as been resolved. Two endogenous timing games are considered which differ in their characterisation of commitment. We show how uncertainty, the cost of capital and cost differences between firms demarcate the equilibrium outcomes. It is shown that a lower cost firm will forego flexibility at higher uncertainty. The nature of commitment will determine whether and for which ranges of uncertainty and costs, leader-follower investment arises. A brief welfare analysis is provided.

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    File URL: http://repec.maynoothuniversity.ie/mayecw-files/N1060201.pdf
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    Paper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n1060201.

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    Length: 22 pages
    Date of creation: Feb 2001
    Date of revision:
    Handle: RePEc:may:mayecw:n1060201
    Contact details of provider: Postal: Maynooth, Co. Kildare
    Phone: 353-1-7083728
    Fax: 353-1-7083934
    Web page: http://www.maynoothuniversity.ie/economics-finance-and-accounting

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    1. David Collie, 1994. "Endogenous timing in trade policy games: Should governments use countervailing duties?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 130(1), pages 191-209, March.
    2. Spencer, Barbara J. & Brander, James A., 1992. "Pre-commitment and flexibility : Applications to oligopoly theory," European Economic Review, Elsevier, vol. 36(8), pages 1601-1626, December.
    3. Elie Appelbaum & Chin Lim, 1985. "Contestable Markets under Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 28-40, Spring.
    4. Gal-Or, Esther, 1985. "First Mover and Second Mover Advantages," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 649-53, October.
    5. Dewit, Gerda & Leahy, Dermot, 2001. "Rivalry in Uncertain Export Markets: Commitment versus Flexibility," CEPR Discussion Papers 2771, C.E.P.R. Discussion Papers.
    6. Hamilton, Jonathan H. & Slutsky, Steven M., 1990. "Endogenous timing in duopoly games: Stackelberg or cournot equilibria," Games and Economic Behavior, Elsevier, vol. 2(1), pages 29-46, March.
    7. Darby, Julia & Hughes Hallett, Andrew & Ireland, Jonathan & Piscitelli, Laura, 1998. "The Impact of Exchange Rate Uncertainty on the Level of Investment," CEPR Discussion Papers 1896, C.E.P.R. Discussion Papers.
    8. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
    9. Sadanand, Asha & Sadanand, Venkatraman, 1996. "Firm Scale and the Endogenous Timing of Entry: a Choice between Commitment and Flexibility," Journal of Economic Theory, Elsevier, vol. 70(2), pages 516-530, August.
    10. Arvan, Lanny, 1991. "Flexibility versus commitment in strategic trade policy under uncertainty : A model of endogenous policy leadership," Journal of International Economics, Elsevier, vol. 31(3-4), pages 341-355, November.
    11. Boyer, Marcel & Moreaux, Michel, 1996. "Capacity Commitment versus Flexibility," IDEI Working Papers 63, Institut d'Économie Industrielle (IDEI), Toulouse.
    12. Kevin Hassett & Gilbert E. Metcalf, 1994. "Investment with Uncertain Tax Policy: Does Random Tax Policy Discourage Investment?," NBER Working Papers 4780, National Bureau of Economic Research, Inc.
    13. Steve Dowrick, 1986. "von Stackelberg and Cournot Duopoly: Choosing Roles," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 251-260, Summer.
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