Flexibility choices and oligopolistic competition in an evolutionary environment

Abstract

We study the problem of the endogenous choice of technology when the level of demand is uncertain. Firms can choose either a ‘flexible’ technology, which allows them to vary the cost structure, or a ‘rigid’ technology, which in periods of high demand is more efficient. Firms tend to adopt the (ex ante) more rewarding technology. We develop a full dynamic model with given number of firms as well as with entry and exit, and with perfect foresight as well as with myopic firms. We show that firms with different technologies can coexist in the market in a permanent way, and characterise the parameter configurations leading to such results.