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Strategic capacity choice with risk-averse firms

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  • Domenico De Giovanni
  • Elena Iakimova

Abstract

We study the joint effect of uncertainty, competition, and risk-aversion on the optimal time and size of firms in a duopoly. As risk-aversion increases, the leader’s alternatives between deterring and accommodating the follower’s entry become equivalent. When the leader’s role is assigned exogenously, risk-aversion reduces equilibrium investment sizes and timing. In equilibrium, the leader is always the largest firm in the market. When the leader’s role is determined in equilibrium, risk-aversion delays the rent equalization point. At high levels of risk-aversion, both firms invest in the same capacity.

Suggested Citation

  • Domenico De Giovanni & Elena Iakimova, 2023. "Strategic capacity choice with risk-averse firms," Journal of the Operational Research Society, Taylor & Francis Journals, vol. 74(4), pages 1166-1182, April.
    • Handle: RePEc:taf:tjorxx:v:74:y:2023:i:4:p:1166-1182
    DOI: 10.1080/01605682.2022.2070036
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