SSE/EFI Working Paper Series in Economics and Finance
Risk-Averse Firms in Oligopoly
Abstract: Does risk aversion lead to softer or fiercer competition?
To give a complete answer, I provide a framework that can accommodate a
wide range of alternative assumptions regarding the nature of competition
and types of uncertainty. I show how more risk aversion will influence a
firm's best response strategies, and that competition is unambiguously
softer only in case of marginal cost uncertainty. In contrast to risk
neutrality, the best response strategies depend on the level of fixed
costs. This fact is extended to cover strategic investment models, and to
analyse the importance of accumulated profits. I conclude by a discussion
of how it is possible to test for risk-averse behaviour in oligopoly by
conditioning on the type of uncertainty.
Keywords: Oligopoly; risk aversion; fixed costs; strategic investment; second order stochastic dominance; background risk; market risk; (follow links to similar papers)
JEL-Codes: D43; D81; L13; L21; (follow links to similar papers)
35 pages, September 1995, Revised February 23, 2000
Previous title: Oligopoly and Risk Aversion
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- This paper is forthcoming as:
Asplund, Marcus, 'Risk-Averse Firms in Oligopoly', International Journal of Industrial Organization.
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