Abstract
This paper examines the effect of salvage market on strategic technology choice and capacity investment decision of two firms that compete on the amount of output they produce under demand uncertainty. A game theoretic model applies such that in the first stage firms choose their production technology between two alternatives: modular production process (flexible technology) or unified production process (inflexible technology). Then at the second stage they decide on the amount of capacity investment: flexible firm makes decision about general and specific components’ capacity and inflexible firm just about unified component (final product). One stage forward both enter the primary market in which demand is uncertain and play a duopoly Cournot game on the amount of quantity they manufacture and finally at the last stage, flexible firm will be able to sell its unsold general components in the secondary market (salvage market) with a deterministic price. Solving optimization problems of the model results in intractable equations which lead us to employ numerical studies considering a specific probability distribution to observe equilibrium behavior of competing firms. Broad range of parameters with respect to established relationships among them have been examined in order to cover all the possible economically reasonable scenarios. Findings are expressed explicitly in the form of observations where we demonstrate that with symmetric parameterization there is a unique symmetric Nash equilibrium in which both firms choose inflexible technology while applying asymmetric parameters has the potential to form two types of equilibrium when 1. Both firms choose inflexible technology or 2. Only one firm chooses flexible technology. Moreover it is shown that there is a specific unified cost threshold that could shift the equilibrium of the game. Finally we discuss on the case that there is no equilibrium and mention some managerial implications of the model.
Highlights
Intensive competition in global market and product-differentiation strategies of firms force the companies to make their investment decisions in more uncertain environment than before
In this paper we explore how the existence of a secondary non-sale capacity market for unsold general components of a producer affects its strategic technology choice and respected capacity investment decision considering demand variability in the primary market
As we focus on the effect of salvage market on strategic choice of producers and since the flexible firm is able to sell its unsold general components with predetermined price less than its cost there PB < cg, so in our parameterization we have weighted the modular cost with concentration on cg rather than cs and avoided the investigation of extreme scenarios that the main part of the total modular cost exist in specific components such that cs cg
Summary
Intensive competition in global market and product-differentiation strategies of firms force the companies to make their investment decisions in more uncertain environment than before. Uncertainty about the size of the market for potential product and the purchasing behavior of consumers affect the strategic technology choice and capacity investment decision of firms. Operation managers try to minimize supply-demand mismatches by considering all available options in the competitive context before choosing their production line technology and decide on their capacity investment. Investment on a modular production line that can further assemble a general and specific component of the final product create the opportunity to respond to the probable demand for unsold components in secondary market. It can equip the firm with a production technology to hedge against demand uncertainty.
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