181. Investment under Uncertainty in a Durable Good Market
Invited abstract in session FA-4: Dynamics of the Firm, stream Continuous and Global Optimization.
Friday, 8:45-10:15Room: H6
Authors (first author is the speaker)
| 1. | Herbert Dawid
|
| Bielefeld University | |
| 2. | Peter M. Kort
|
| University of Tilburg | |
| 3. | Xingang Wen
|
| Business Administration and Economics, Bielefeld University |
Abstract
We consider a monopolistic firm that decides on the timing and production capacity for introducing a durable good into a market characterized by consumer heterogeneity and demand uncertainty. We show that when consumers are less heterogeneous, the firm should invest later, i.e. wait for product attractiveness to grow to a sufficiently high level, in a large production capacity. In case consumers are very heterogeneous, the firm should invest early in a small production capacity. In the latter case, selling the durable good in small quantities enables the firm to price discriminate over time, generating a high payoff. Whether an increase in consumer heterogeneity has a positive, negative or U-shaped impact on the value of the firm’s investment opportunity depends on the relationship between trend and volatility of the dynamics of product attractiveness. The fact that an increase in consumer heterogeneity may have a positive effect on the firm value distinguishes the durable goods case from market settings with non-durable products.
Keywords
- Dynamic Programming
- Economic Modeling
Status: accepted
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