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Investing in capabilities: bidding in strategic factor markets with costly information

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Author Info
Catherine A. Maritan (Whitman School of Management, Syracuse University, Syracuse, NY 13244-2450, USA)
Robert E. Florence (School of Business, St. Bonaventure University, St. Bonaventure, NY 14778, USA)
Abstract

We explore how firms invest in capabilities by acquiring assets in strategic factor markets. We formalize the problem using an auction model in which heterogeneous firms bid for an asset to investigate relationships among expected returns to the investment, information used to estimate the expected returns and information used to estimate the expected bids from competitors. Our results demonstrate the importance of recognizing different components of the expected returns and the importance of considering the cost of acquiring information to inform the bid. Through this analysis we illustrate complementarities and trade-offs that are involved in the process of making investment decisions. Copyright © 2008 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/mde.1385
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 29 (2008)
Issue (Month): 2-3 ()
Pages: 227-239
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:wly:mgtdec:v:29:y:2008:i:2-3:p:227-239

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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  1. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June. [Downloadable!] (restricted)
  2. Baye, M.R. & Kovenock, D. & De Vries, C.G., 1991. "Rigging The Lobbying Process: An Application Of The All- Pay Auction," Purdue University Economics Working Papers 1002, Purdue University, Department of Economics.
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  3. CARLISS Y. Baldwin & Kim B. Clark, 1992. "Capabilities And Capital Investment: New Perspectives On Capital Budgeting," Journal of Applied Corporate Finance, Morgan Stanley, vol. 5(2), pages 67-82. [Downloadable!] (restricted)
  4. Jerker Denrell & Christina Fang & Sidney Winter, 2003. "The Economics of Strategic Opportunity," LEM Papers Series 2003/10, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy. [Downloadable!]
  5. Riley, John G & Samuelson, William F, 1981. "Optimal Auctions," American Economic Review, American Economic Association, vol. 71(3), pages 381-92, June. [Downloadable!] (restricted)
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