This paper examines the relationship between a firm's cost flexibility and product price dispersion. We show that a mean preserving increase in demand variability need not lead to an increase in the value of flexibility or in the optimal level of This is contrary to results in the literature which are achieved by assuming a quadratic cost curve. IN A pioneering paper, Stigler [1939] considered a firm's choice of plant flexibility. He argued that if firms face exogenous demand fluctuations, then it can be worthwhile to select a more plant, one which permits higher profit in a wide range of possible demand states at the cost of lower profit in other demand states.' Stigler suggested that the desirability of a more flexible plant increases as price variability increases. Marschak and Nelson [1962] explored this conjecture. They showed that an increase in the variance of price causes expected profit from a more flexible plant to rise relative to expected profit from a less flexible plant. More recently, Mills [1984] considered long run equilibrium in a competitive industry subject to fluctuating demand when firms can select a level of He showed that the optimal level of flexibility increases as the variance of demand increases. The results of Marschak and Nelson and Mills, however, are based on the strong assumption that the cost function is quadratic, an assumption which is known to be restrictive in the analysis of decision making under uncertainty. In this paper we generalize the analysis of cost flexibility in two ways. First, we adopt the Rothschild-Stiglitz [1970] definition of increased price variability and show that the results of Marschak and Nelson and of Mills continue to hold for a quadratic cost function. Second, we relax the assumption that cost is a quadratic function of output and show that the results in the existing literature are crucially dependent on this assumption. After formulating the model, we consider the effect of an increase in price dispersion on the value of flexibility, defined as willingness to pay. Then we examine the effect of increased price variability on the optimal level of Finally, we consider the impact of an increase in demand variability on the equilibrium in a competitive industry. In all cases we find that the results in the literature continue to hold for a general mean preserving