Strategic capacity choice with risk-averse firms

We study the joint effect of uncertainty, competition, and risk-aversion on the optimal time and size of firms in a duopoly. As risk-aversion increases, the leader's alternatives between deterring and accommodating the follower's entry become equivalent. When the leader's role is assigned exogenously, risk-aversion reduces equilibrium investment sizes and timing. In equilibrium, the leader is always the largest firm in the market. When the leader's role is determined in equilibrium, risk-aversion delays the rent equalization point. At high levels of risk-aversion, both firms invest in the same capacity.

Automated summary

This study examines the joint effect of uncertainty, competition, and risk-aversion on the optimal time and size of firms in a duopoly. It finds that increasing risk-aversion affects the leader's choice between deterring and accommodating the follower's entry, resulting in reduced equilibrium investment sizes and timing.