Production versus safety in a risky competitive industry
Original version
Hausken, K. (2012) Production versus safety in a risky competitive industry. International Journal of Decision Sciences, Risk and Management, 4(1-2), pp. 92-107 10.1504/IJDSRM.2012.046614Abstract
Each of two firms has a resource that can be converted into safety versus
productive investment in the first stage, with Bertrand competition on price in the
second stage of a two-stage game. The firms produce differentiated products in a risky
environment. If risks are negligible, investing more in safety decreases the price, and
producing more increases the price. The results depend on whether risks get reduced
concavely or convexly. With concave (convex) risk reduction, higher safety
investment by the competitor causes higher (lower) own safety investment. With
concave (convex) risk reduction, lower firm loyalty by consumers implies lower
(higher) safety investment, higher product substitutability implies higher (lower)
safety investment, and more adverse implications of the competitor’s productive
investment on the demand intercept of the firm implies lower (higher) safety
investment. When each firm independently maximises profit in a Nash equilibrium,
safety investment is lower than when a social planner maximises social
welfare and when maximising joint industry profits. The impact of the income,
substitution, and interdependence effects on safety investment and price is finally
analysed.
Description
The article was originally published as follows: Hausken, K. (2012) Production versus safety in a risky competitive industry. International Journal of Decision Sciences, Risk and Management, 4(1-2), pp. 92-107. Posted here with permission from Inderscience.