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Ruble, Richard, Versaevel, Bruno
and De Villemeur, Étienne
(2010)
Timing Vertical Relationships.
TSE Working Paper, n. 10-181
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Abstract
We show that the standard analysis of vertical relationships transposes directly to investment
timing. Thus, when a firm undertaking a project requires an outside supplier (e.g. an
equipment manufacturer) to provide it with a discrete input, 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 index, which is related to the parameters of a stochastic
downstream demand. When feasible, vertical restraints restore efficiency. For instance, the
upstream firm can induce entry at the correct investment threshold by selling a call option
on the input. Otherwise, competition may substitute for vertical restraints. In particular, if
two firms are engaged in a preemption race downstream, the upstream firm sells the input to
the first investor at a discount that is chosen in such a way that the race to preempt exactly
offsets the vertical externality, and this leader invests at the optimal market threshold.
| Item Type: | Monograph (Working Paper) |
|---|---|
| Language: | English |
| Date: | 23 June 2010 |
| JEL Classification: | C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games D43 - Oligopoly and Other Forms of Market Imperfection D92 - Intertemporal Firm Choice and Growth, Investment, or Financing L13 - Oligopoly and Other Imperfect Markets |
| Subjects: | B- ECONOMIE ET FINANCE |
| Divisions: | TSE-R (Toulouse) |
| Site: | UT1 |
| Date Deposited: | 18 Jan 2012 06:02 |
| Last Modified: | 02 Apr 2021 15:36 |
| OAI Identifier: | oai:tse-fr.eu:22908 |
| URI: | https://publications.ut-capitole.fr/id/eprint/3398 |
