Article

On the strategic value of risk management

Thomas-Olivier Léautier et Jean-Charles Rochet

Résumé

This article examines how firms facing volatile input prices and holding some degree of market power in their product market link their risk management and their production or pricing strategies. This issue is relevant in many industries ranging from manufacturing to energy retailing, where firms that are rendered “risk averse” by financial frictions decide on and commit to their hedging strategies before their product market strategies. We find that commitment to hedging modifies the pricing and production strategies of firms. This strategic effect is channeled through the risk-adjusted expected cost, i.e., the expected marginal cost under the probability measure induced by shareholders' “risk aversion”. It has opposite effects depending on the nature of product market competition: commitment to hedging toughens quantity competition while it softens price competition. Finally, not committing to the hedging position can never be an equilibrium outcome: committing is always a best response to non-committing. In the Hotelling model, committing is a dominant strategy for all firms.

Mots-clés

Risk Management; Price and Quantity Competition;

Codes JEL

  • G32: Financing Policy • Financial Risk and Risk Management • Capital and Ownership Structure • Value of Firms • Goodwill
  • L13: Oligopoly and Other Imperfect Markets

Remplace

Thomas-Olivier Léautier et Jean-Charles Rochet, « On the strategic value of risk management », TSE Working Paper, n° 12-332, 3 septembre 2012.

Thomas-Olivier Léautier et Jean-Charles Rochet, « On the strategic value of risk management », TSE Working Paper, n° 13-433, 14 septembre 2013.

Référence

Thomas-Olivier Léautier et Jean-Charles Rochet, « On the strategic value of risk management », International Journal of Industrial Organization, vol. 37, novembre 2014, p. 153–169.

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Publié dans

International Journal of Industrial Organization, vol. 37, novembre 2014, p. 153–169