SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

Abstract: Does risk aversion lead to softer or fiercer competition? To give a complete answer, I provide a framework that can accommodate a wide range of alternative assumptions regarding the nature of competition and types of uncertainty. I show how more risk aversion will influence a firm's best response strategies, and that competition is unambiguously softer only in case of marginal cost uncertainty. In contrast to risk neutrality, the best response strategies depend on the level of fixed costs. This fact is extended to cover strategic investment models, and to analyse the importance of accumulated profits. I conclude by a discussion of how it is possible to test for risk-averse behaviour in oligopoly by conditioning on the type of uncertainty.

Keywords: Oligopoly; risk aversion; fixed costs; strategic investment; second order stochastic dominance; background risk; market risk

JEL-codes: D43; D81; L13; L21

35 pages, First version: September 1995. Revised: February 23, 2000. Earlier revisions: September 21, 1999.

Note: Previous title: Oligopoly and Risk Aversion

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