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Capacity investment choices under cost heterogeneity and output flexibility in oligopoly

Chevalier-Roignant, Benoît; Flath, Christoph M.; Kort, Peter M.; Trigeorgis, Lenos

Authors

Benoît Chevalier-Roignant

Christoph M. Flath

Peter M. Kort



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.

Citation

Chevalier-Roignant, B., Flath, C. M., Kort, P. M., & Trigeorgis, L. (2021). Capacity investment choices under cost heterogeneity and output flexibility in oligopoly. European Journal of Operational Research, 290(3), 1154-1173. https://doi.org/10.1016/j.ejor.2020.08.046

Journal Article Type Article
Acceptance Date Aug 27, 2020
Online Publication Date Sep 14, 2020
Publication Date May 1, 2021
Deposit Date Feb 14, 2023
Journal European Journal of Operational Research
Print ISSN 0377-2217
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 290
Issue 3
Pages 1154-1173
DOI https://doi.org/10.1016/j.ejor.2020.08.046
Public URL https://durham-repository.worktribe.com/output/1181026