Thursday 6 February

Flexible or dedicated production: Strategic investment under uncertainty

Xingang Wen – Universität Bielefeld

Abstract:

Volume flexibility, as one of the most common forms of operational flexibility, has been adopted in practice by firms confronted with demand fluctuations. From a managerial perspective, investing in volume flexibility seems to pay off in a monopoly market. However, whether it still pays off in an oligopoly or duopoly market is unclear. We examine firms’ investment decisions in a duopoly market with uncertain demand. The firms’ production technology is either dedicated, i.e. producing up to capacity, or volume flexible. Each firm’s investment decision involves the optimal time to invest, choosing the capacity size, and also choosing between a dedicated or a volume flexible technology. We find that firms choose different technologies in equilibrium; in case the first investor chooses to be flexible, the second investor is better off to be dedicated, and vice versa. The outcome of a flexible first investor and a dedicated second investor mainly prevails in the equilibrium.

Registration, please contact robin@em-lyon.com

Room B3-103, Lyon campus