értekezés - Budapesti Corvinus Egyetem

Adam et al. [2004] show that an interior solution (heterogeneity) does not exist if either the
demand curve is flat (the industry is a price-taking industry, e.g. highly competitive market
with many market players), or if the cost shocks are independently distributed (meaning
that output prices will not co-vary with shocks even if all firms remain unhedged). In these
cases, either all firms hedge or all firms remain unhedged. Otherwise, the ratio of
E(w)/E(w 2 ) – which depends on the production technology and the distribution of cash
flow shock, and which captures the relative importance of the cost and the benefit from not
hedging – together with industry parameters (such as market size, steepness of demand
curve and marginal cost curve) will determine the degree of hedging heterogeneity within
an industry.
Reaction functions of hedge ratios in a two-firm model as per the Adam et al. [2004]
model
Source: Adam et al. [2004, pp. 45.]
The reaction functions reveal that there are two corner equilibria, in which one firm hedges
completely and the other firm remains completely unhedged. There is a discontinuity in
each reaction function at h = 0:434. Specifically, if Firm 1 chooses h = 0:434, then Firm 2
185 Cournot-Nash equilibrium requires each firm’s output choice to be a best response to the output choices of
all other firms, that is, an output decision, which maximizes profit.
181