Observability, Product Flexibility and Substitutability in Oligopoly
25 Pages Posted: 2 Jan 2006
Date Written: December 2005
We study in this paper how technological flexibility choices and equilibrium configurations depend on industry characteristics (demand function and cost parameters specific to the multiproduct flexible technology and to the product dedicated technologies) and on the observability conditions of technologies prevailing in the industry. We show that better observability of technological choices tends to promote the adoption of more flexible technologies. Our main results are as follows. First, the dedicated equilibria are more likely under unobservability that under observability while dedicated and flexible equilibria are equally probable under the both observability conditions. Second, the existence of better substitutes promotes dedicated configurations. Third, mixed configurations never emerge under observability provided that the goods are not too strong substitutes. Fourth, both types of equilibria exist for some parameter values whatever the observability conditions. Fifth, the firms would always earn higher profits in dedicated configurations than in flexible configurations; thus, if a flexible equilibrium emerges, a fortiori if it is the only equilibrium, as it is the case for some values of the parameters, this equilibrium is a flexibility trap.
Keywords: Flexible Manufacturing Technology, Commitment, Strategic Equilibrium, Substitutability
JEL Classification: D43, L13
Suggested Citation: Suggested Citation