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Optimal Output for the Regret-Averse Competitive Firm Under Price Uncertainty

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  • Broll, Udo
  • Ergozue, Martin
  • Welzel, Peter
  • Wong, Wing-Keung

Abstract

We study the optimal production of a competitive risk-averse firm under price uncertainty. We suppose that the firm is also regret-averse. For example, if market prices ex post turn out to be very high the firm might regret not producing more. If it turns out that the price is low the firm might regret an over-production. We find that optimal output under regret aversion might be higher than under risk aversion. We also prove that optimal production could increase or decrease when the regret-averse coefficient increases. In general, we show that the regret-avers firm tend to hedge their bets, taking into account the possibility that their decisions may turn out to be ex post not optimal. These predictions can help explain the fact the price uncertainty has not such an extreme impact than those would be derived from pure risk-averse preferences.

Suggested Citation

  • Broll, Udo & Ergozue, Martin & Welzel, Peter & Wong, Wing-Keung, 2013. "Optimal Output for the Regret-Averse Competitive Firm Under Price Uncertainty," MPRA Paper 51703, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:51703
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    References listed on IDEAS

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    7. Alghalith, Moawia, 2016. "A note on the theory of the firm under multiple uncertainties," European Journal of Operational Research, Elsevier, vol. 251(1), pages 341-343.
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    More about this item

    Keywords

    Firm; decision making; price uncertainty; regret aversion; risk aversion;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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