FEEM working papers "Note di lavoro" series
1999 .028

Optimal Capacity Adjustment by a Multiplant Firm


Authors: Michele Moretto
Series: Economy and Society
Editor: Gianmarco I.P. Ottaviano
Type: Journal
Keywords: Exit,Option value,Irreversibility
JEL n.: D92,L11
JEL: Rivista Internazionale di Scienze Economiche e Commerciali
Date: 2003

Abstract

The paper studies the effect of scale economies on the optimal capacity adjustment of a mutiplant firm. It is shown that with increasing economies of scale plants are ranked in decreasing order, after which the optimal choice is to scrap the largest one. On the contrary, if there are decreasing economies of scale the optimal policy would be to wait before abandoning intermediate plants. That is, decreasing economies of scale amplify the effect of uncertainty on disinvestment and tend to increase the plant's life.

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