Risk-averse firms in oligopoly

Does risk aversion lead to softer or fiercer competition? This paper provides a framework that accommodates a wide range of alternative assumptions regarding the nature of competition and types of uncertainty. It shows how risk aversion influences firms' best-response strategies. Only in the case of marginal cost uncertainty does higher risk aversion make competition unambiguously softer. The risk-averse best response strategies depend on the level of fixed costs. This fact is used to analyse strategic investments in capacity and the importance of accumulated profits. The paper concludes with a discussion of ways of empirically testing for risk-averse behaviour in oligopoly. (C) 2002 Elsevier Science B.V. All rights reserved.