The way in which economic agents respond to unexpected changes to demand is a central issue in contemporary business cycle theories. Although several empirical papers have used macro data to evaluate this issue there are very few results available that have used direct measures of expectation errors from micro panel data. This paper uses micro panel data from a New Zealand quarterly tendency survey to derive expectation errors for nine variables over an unusually long period of 24 years. A vector-autoregressive model is estimated and used to simulate the dynamic reaction of manufacturers to surprising changes to demand. Unexpected changes to demand are important in explaining unplanned changes in output, inventories, employment and labor turnover. Selling price and cost expectation errors are not particularly sensitive to surprising changes to demand. Copyright 1991 by Blackwell Publishing Ltd

How do firms react to surprising changes to demand?: a vector autoregressive analysis using business survey data

The brick industry is characterized by regional markets, lumpy capacity increments and high fixed costs. In such an industry, the coordination of rival expansions in capacity can be crucial to the profitability of those expansions. Evidence from the British brick industry suggests that excess investments are generally avoided, but there is little support for existing theories to explain how this is achieved. The explanation for how coordination failures are avoided is based on firm heterogeneity, the regional dimension to the investment decision and the prospects for, and consequences of, growth by acquisition.

Investment interdependence and the coordination of lumpy investments: evidence from the British brick industry

Service-based capacity strategy for manufacturing service duopoly of differentiated prices and lognormal random demand

Since the work of George Richardson on the problem of investment co ordination, the literature has focused on explaining equilibrium in investment games and neglected the problem of how investments are coordinated. This paper reports the findings of a case study of the brick industry which used grounded theory techniques to develop a new analysis of investment co ordination. Our main findings indicate that, despite the high cost of excess capacity and the very clear signalling of investment intentions, brick firms are reluctant to stand back and delay their own investments when a rival firm is expanding. The fact that for the most part excess investment is avoided is explained by reference to firms' heterogeneity and constraints to investment.

Investment sequencing in the brick industry: An application of grounded theory

In this paper we analyze the profitability of information sharing among Cournot oligopolists receiving private information about random demand. We model the random demand as a linear demand having, 1) an unknown intercept, and 2) an unknown slope. In each of these two scenarios, firms observe private signals about the unknown parameter. We show that in the scenario-1, if the private signal observed by firms is accurate enough, information exchange is profitable and in the scenario-2, if there is a sufficiently large variation in the demand slope and private signals are accurate enough, firms earn strictly higher profits by sharing their information rather than keeping it private.

http://www.gcd.udc.es/subido/andres/publicaciones/politica_ieconomica_teoria_juegos/information_exchanges_cournot_duopolies_2003.pdf

Information exchanges in cournot duopolies

This paper considers the capacity choice of duopolists who set price ex-ante under demand uncertainty with risk-neutrality. The duopolists compete for market shares on the basis of availability of supply, rather than by price competition. Collusive pricing coexists with Cournot–Nash capacity choice. A formal model is presented, where the market share of each firm may deviate from the certainty share due to rationing. With shares reflecting different costs, capacity utilisation for the lower cost firm is expected to be substantially lower. The implications for the price-cost margin and capacity formation are also explored.

Investment under Demand Uncertainty, Ex-Ante Pricing, and Oligopoly

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Investment under Demand Uncertainty, Ex-Ante Pricing, and Oligopoly