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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 that 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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Paper provided by University of Brescia, Department of Economics in its series Working Papers with number ubs0501.

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Date of creation: 2005
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Handle: RePEc:ubs:wpaper:ubs0501
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Web page: http://www.unibs.it/atp/page.1019.0.0.0.atp?node=224

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  1. 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.
  2. Asplund, Marcus, 2002. "Risk-averse firms in oligopoly," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 995-1012, September.
  3. 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.
  4. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  5. FUJITA, Masahisa & THISSE, Jacques-François, . "Globalisation and the evolution of the supply chain: who gains and who loses?," CORE Discussion Papers RP 1968, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. 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.
  7. Michael Devereux & Rachel Griffith, 1996. "Taxes and the location of production: evidence from a panel of US multinationals," IFS Working Papers W96/14, Institute for Fiscal Studies.
  8. 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," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00268769, HAL.
  9. Banal-Estanol, Albert & Ottaviani, Marco, 2005. "Mergers with Product Market Risk," CEPR Discussion Papers 4831, C.E.P.R. Discussion Papers.
  10. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-91, June.
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