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The Flexibility to Switch between Different Products
In many situations of fluctuating demand, firms react by diversifying into several different markets. The use of flexible (non-dedicated) equipment implies higher costs for the production of one good, but makes it easier (less costly) to switch to the production of another. When flexibility is modelled in this way, the market will usually be characterized by the coexistence of a variety of different firms, some using (high-cost) flexible technologies, others (low-cost) dedicated production units. This heterogeneity of firms is due to the fact that the choice between specialization and flexibility involves a fundamental non-convexity.
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