Investment Timing and Vertical Relationships

in International Journal of Industrial Organization, 33 (1)

ISSN : 0167-7187

par Billette de Villemeur, Etienne ; Ruble, Richard ; Versaevel, Bruno (19..-....)

2014 - 110-123 p. | En anglais

We show that the standard analysis of vertical relationships transposes directly to investment dynamics. Thus, when a firm undertaking a project requires an outside supplier (e.g., an equipment manufacturer) to provide it with a discrete input to serve a growing but uncertain demand, and if the supplier has market power, investment occurs too late from an industry standpoint. The distortion in firm decisions is characterized by a Lerner-type index. Despite the underlying investment option, greater volatility can result in a lower value for both firms. We examine several contractual alternatives to induce efficient timing, a novel vertical restraint being for the upstream to sell a call option on the input. We also extend the model to allow for downstream duopoly. When downstream firms are engaged in a preemption race, the upstream firm sells the input to the first investor at a discount such that the race to preempt exactly offsets the vertical distortion, and this leader invests at the optimal time. These results are illustrated with a case study drawn from the pharmaceutical industry.

Voir la revue «International Journal of Industrial Organization»

Signalez un lien brisé

Chargement des enrichissements...