Strategic Choice of Flexible Production Technologies and Welfare Implications

Abstract

This paper examines the market. conditions under which firms would choose a more flexible production technology with respect. to product de-sign. We use a two-stage game in which firms choose between flexible and less flexible production technologies in the first stage and subsequently choose output. We find conditions under which firms choose the flexible production option purely for strategic reasons, foresaking profits. In other words, the production technology game can be a Prisoner's Dilemma. Con-sumers, on the other hand, always benefit from the introduction of flexible production technologies. We derive the conditions under which the result-ing equilibria are efficient. 1

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