Posted by D. Daniel Sokol
Lota D. Tamini (Laval University) describes Optimal quality choice under uncertainty on market development.
ABSTRACT: This paper analyzes the impact of risk and ambiguity aversion – Knightian uncertainty – on the choice of optimal quality and timing of market entry. Irreversibility of the investment in product development is introduced in a continuous-time stochastic model applying the real option literature. We consider a market characterized by a duopoly with a Stackelberg-Nash game for quality choice. When the follower provides a higher-quality good, the level of quality is decreasing in ambiguity aversion while it is a non-monotonic function of the level of risk. For low levels of risk, the increase of product quality is an efficient response. Up to certain threshold level of risk, risk and ambiguity aversion reduce the optimal quality level and increase the value of waiting when the follower supplies a higher-quality good. The implication is that risk and ambiguity aversion allow the leader to make a sustainable monopoly profit. Wh! en the follower supplies a lower-quality good, there is no value for it to wait. It should therefore provide the lowest-quality good possible. In a vertically integrated supply chain firms provide higher quality, and the difference between vertically integrated and non-integrated firms is increasing in risk and ambiguity aversion.
Featured News
Senate Democrats Urge DOJ Investigation into Alleged Big Oil Collusion
May 30, 2024 by
CPI
ConocoPhillips Acquires Marathon Oil for $22.5 Billion in Major Energy Sector Consolidation
May 29, 2024 by
CPI
Judge Denies Amazon’s Bid to Dismiss FTC Lawsuit Over Prime Membership Practices
May 29, 2024 by
CPI
Germany and France Advocate for Major EU Competition Reform
May 29, 2024 by
CPI
Equifax Accused of Monopolizing Employment Verification Market in New Suit
May 29, 2024 by
CPI
Antitrust Mix by CPI
Antitrust Chronicle® – Merger Guidelines Retrospective
May 21, 2024 by
CPI
Mergers of Complements
May 21, 2024 by
CPI
Personality Traits, Private Equity, and Merger Analysis
May 21, 2024 by
CPI
The 2023 Merger Guidelines: Lessons in the Importance of Incipiency, Modern Economics, and Monopsony
May 21, 2024 by
CPI
The 2023 Merger Guidelines: Sharpening Merger Analysis
May 21, 2024 by
CPI