Duopolistic competition under risk aversion and uncertainty

• Main Authors: CHRONOPOULOS, Michail, DE REYCK, Bert, SIDDIQUI, Afzal
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2014
• Subjects: Investment analysis; Real options; Competition; Risk aversion; Business Administration, Management, and Operations
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6758; https://ink.library.smu.edu.sg/context/lkcsb_research/article/7746/viewcontent/Duopolistic_competition_under_risk_aversion_and_uncertainty.pdf
• Institution: Singapore Management University

A monopolist typically defers entry into an industry as both price uncertainty and the level of risk aversion increase. By contrast, the presence of a rival typically hastens entry under risk neutrality. Here, we examine these two opposing effects in a duopoly setting. We demonstrate that the value of a firm and its entry decision behave differently with risk aversion and uncertainty depending on the type of competition. Interestingly, if the leader’s role is defined endogenously, then higher uncertainty makes her relatively better off, whereas with the roles exogenously defined, the impact of uncertainty is ambiguous.