Observability, Product Flexibility and Substitutability in Oligopoly

25 Pages Posted: 2 Jan 2006

See all articles by Marcel Boyer

Marcel Boyer

CIRANO, Université de Monréal

Armel Jacques

Université de la Réunion

Michel Moreaux

Institut Universitaire de France

Date Written: December 2005

Abstract

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

Boyer, Marcel and Jacques, Armel and Moreaux, Michel, Observability, Product Flexibility and Substitutability in Oligopoly (December 2005). Available at SSRN: https://ssrn.com/abstract=873349 or http://dx.doi.org/10.2139/ssrn.873349

Marcel Boyer (Contact Author)

CIRANO, Université de Monréal ( email )

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Montreal, Quebec H3A 2M8
Canada
514 985-4000 (Phone)
514-985-4039 (Fax)

HOME PAGE: http://www.cirano.qc.ca/~boyerm

Armel Jacques

Université de la Réunion ( email )

Campus du Moufia
15, avenue Rene Cassin BP 7151 -97 715
Saint-Denis messag cedex 9
France

Michel Moreaux

Institut Universitaire de France ( email )

103, bld Saint-Michel
75005 Paris
France

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