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The Effect of Vertical Relationships on Investment Timing

Author

Listed:
  • Dimitrios Zormpas

    (Department of Economics and Management, University of Brescia, C.da S. Chiara, 50, 25122, Brescia, Italy)

  • Rossella Agliardi

    (Department of Mathematics, University of Bologna, Viale Filopanti 5, 40126, Italy)

Abstract

Billette de Villemeur et al. [Billette de Villemeur, E., Ruble, R. and Versaevel, B. [2014] Investment timing and vertical relationships, Int. J. Industrial Organization 33, 110–123] discuss the case of a firm undertaking a project in order to serve an uncertain demand. They show that when the investor requires an outside supplier with market power to provide it with a discrete input the investment occurs too late from an industry stand point. In this paper, we extend their work assuming that the input production cost is also uncertain. We show that upstream market power results in dynamic inefficiency also in our framework. We also demonstrate how this inefficiency is affected by the correlation between the two stochastic terms.

Suggested Citation

  • Dimitrios Zormpas & Rossella Agliardi, 2021. "The Effect of Vertical Relationships on Investment Timing," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 23(03), pages 1-10, September.
    • Handle: RePEc:wsi:igtrxx:v:23:y:2021:i:03:n:s0219198921500055
    DOI: 10.1142/S0219198921500055
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    More about this item

    Keywords

    Irreversible investment; real options; vertical relationships;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing

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