Betting on risk: Modeling investment in preparedness in a cournot market.

摘要

This dissertation models the interaction of firms in a game in which they must decide whether to invest in disaster preparedness (e.g., through emergency planning, stockpiling of inventories, etc.). We develop the model in a general n-player form, but focus on the case of a duopoly to illustrate the interactions between participants in the market. The firms are assumed to share a single market represented by the Cournot model, in which firms reach their decisions independently (i.e., without collusion). We consider two alternatives for preparedness cost: one where the preparedness cost is a fixed cost that is independent of the production level; and one where the preparedness cost is a variable cost per unit of production. In each game, we find and characterize the equilibrium solution(s). In some cases, our model yields multiple equilibria. We also perform sensitivity analysis to study the effects of parameter variations on the outcome of the competition. These variations focus on both environmental factors (e.g., the reservation price of the good, or the probability of disaster) and firm-specific factors (e.g., the variable cost of production). Moreover, we address the effects of equilibrium mixing strategy of other firms through calculation of equilibrium mixing probabilities. Finally, we compare the equilibrium with the social optimum, and discuss mechanisms for achieving the socially optimal level of investment in preparedness.