Rivalry in uncertain export markets: commitment versus flexibility

Abstract

This paper examines optimal trade policy in a two-period oligopoly model, with a home and a foreign firm choosing capital and output. Demand uncertainty, resolved in period two, gives rise to a trade-off between strategic commitment and flexibility in the firms' investment decisions. Firms' investment timing is endogenous and can be manipulated by the home government, which sets a subsidy before firms decide when to invest. We show that when the government wishes to manipulate investment timing, it will choose its policy to deter investment commitment by the home or the foreign firm. D

Export, Exchange Rate Risk and Hedging: The Duopoly Case

“…This kind of model was introduced by Brander and Spencer (1985) and has been modified and extended in various ways. A good overview is given by Brander (1995), but there are also more recent studies which deal with this kind of model, for example, see Dewit and Leahy (2004), Clarke and Collie (2008) or Fung et al (2009). In order to link these models to the current paper, we could think of a setting where no futures markets exist and the government of one country offers the domestic firm the opportunity to insure against the exchange rate risk while the other firm has no hedging opportunity.…”

Investment timing under uncertainty in oligopoly: Symmetry or leadership?

“…An assessment of policies that influence uncertainty would, however, require modelling agents' attitudes to risk and stretches beyond the scope of this paper. 30 Commitment deterrence policies are discussed (in an open-economy setting) in Dewit and Leahy (2004). approach. Crucially, in this case investment leadership no longer emerges as an equilibrium.…”

Dedicated vs product flexible production technology: Strategic capacity investment choice

“…We extend this approach by considering an incumbent-entrant situation. Tseng (2004), Dewit and Leahy (2003) and Chang (1993) discuss flexibility in an incumbent-entrant setting. However, they do not consider product flexibility.…”