On the strategic value of risk management

Léautier, Thomas-Olivier and Rochet, Jean-Charles (2014) On the strategic value of risk management. International Journal of Industrial Organization, vol. 37. pp. 153-169.

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Official URL: http://tse-fr.eu/pub/28844

Abstract

This article examines how firms facing volatile input prices and holding some degree of market power in their product market link their risk management and their production or pricing strategies. This issue is relevant in many industries ranging from manufacturing to energy retailing, where firms that are rendered “risk averse” by financial frictions decide on and commit to their hedging strategies before their product market strategies. We find that commitment to hedging modifies the pricing and production strategies of firms. This strategic effect is channeled through the risk-adjusted expected cost, i.e., the expected marginal cost under the probability measure induced by shareholders' “risk aversion”. It has opposite effects depending on the nature of product market competition: commitment to hedging toughens quantity competition while it softens price competition. Finally, not committing to the hedging position can never be an equilibrium outcome: committing is always a best response to non-committing. In the Hotelling model, committing is a dominant strategy for all firms.

Item Type: Article
Language: English
Date: November 2014
Refereed: Yes
Uncontrolled Keywords: Risk Management, Price and Quantity Competition
JEL codes: G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
L13 - Oligopoly and Other Imperfect Markets
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse), TSM Research (Toulouse)
Site: UT1
Date Deposited: 16 Mar 2015 14:53
Last Modified: 10 Apr 2018 13:10
OAI ID: oai:tse-fr.eu:28844
URI: http://publications.ut-capitole.fr/id/eprint/16648

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