RT Journal Article
SR 00
ID 10.1016/j.ijindorg.2014.07.006
A1 Léautier, Thomas-Olivier
A1 Rochet, Jean-Charles
T1 On the strategic value of risk management
JF International Journal of Industrial Organization
YR 2014
FD 2014-11
VO vol. 37
SP 153
OP 169
K1 Risk Management
K1 Price and Quantity Competition
AB 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.
PB Elsevier
SN 0167-7187
LK https://publications.ut-capitole.fr/id/eprint/16648/
UL http://tse-fr.eu/pub/28844