Demand diversification under uncertainty and market power

Ergun Dogan, Russell Smyth, Ian Wills

Research output: Contribution to journalArticleResearchpeer-review

5 Citations (Scopus)

Abstract

This paper justifies theoretically and empirically the diversification behaviour of an importing firm when it chooses the mixture of potentially differentiated products of its major input under price uncertainty. The paper investigates an equilibrium relationship among three key explanatory variables, which are the expected price, the systematic risk of price, and monopolistic market power of the suppliers in the market. The theoretical section shows that there exists a conflict between the risk-diversification effect and the agent's preference over certain products when the importor chooses the vector of optimal quantity shares. The latter effect may disturb or even dominate the former, which can be represented in an equilibrium relationship similar to the framework of the CAPM. As an empirical application, the Chinese wheat import market is examined and analysed to answer the questions raised by the basic statistics.

Original languageEnglish
Pages (from-to)425-450
Number of pages26
JournalAsian Economic Journal
Volume15
Issue number4
DOIs
Publication statusPublished - 1 Jan 2001

Keywords

  • CAPM
  • Demand diversification
  • Market power

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