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Fighting over Uncertain Demand: Investment Commitment versus Flexibility

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  • Gerda Dewit
  • Dermot Leahy

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

Abstract

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.

Suggested Citation

  • Gerda Dewit & Dermot Leahy, 2001. "Fighting over Uncertain Demand: Investment Commitment versus Flexibility," Economics Department Working Paper Series n1060201, Department of Economics, National University of Ireland - Maynooth.
    • Handle: RePEc:may:mayecw:n1060201
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    File URL: http://repec.maynoothuniversity.ie/mayecw-files/N1060201.pdf
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    References listed on IDEAS

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    Cited by:

    1. Dewit, Gerda & Leahy, Dermot, 2004. "Rivalry in uncertain export markets: commitment versus flexibility," Journal of International Economics, Elsevier, vol. 64(1), pages 195-209, October.

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    More about this item

    Keywords

    Uncertainty; Investment Commitment; Oligopoly; Action Commitment; Observable Delay.;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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