Strategic choice of flexible production technology using game theory approach

This paper examines the conditions under which a firm would choose a flexible production technology or a dedicated technology in a duopoly environment. We model this technology choice by having two firms simultaneously select from two production technologies in the first stage and subsequently take in a Cournot production quantity subgame. Conditions under which technology equilibriums exist are given. We find that the premium a firm is willing to pay for flexibility increases as the market size increases and the product substitutability decreases. We also find that Prisoner's Dilemma does not necessarily occur in the production technology game, which is different from previous studies.

► We model the technology choice of two duopoly firms by game theory approach.
► As market size increases, firms are more likely to invest in flexible technology.
► Firms are less likely to invest in flexible technology for substitutable products.
► Flexible technology may benefit both firms under some conditions.