Real Asset Valuation under Imperfect Competition: Can We Forget About Market Fundamentals?
AbstractReal assets are usually valued by computing the stream of profits they can bring to a price-taking firm in a liquid market. This method ignores market fundamentals by assuming that all the relevant information is included in the spot price. Our article analyses the bias resulting from such an approach when the market is imperfectly competitive. We propose a stylised two-period model of the natural gas market with no uncertainty, focusing on strategic interactions between two types of oligopolistic players—pure traders and suppliers with downstream customers—who have access to storage. We show that the true value of storage capacity is not the same for traders and for suppliers. Comparing the latter value with the traditional price-taking valuation reveals a systematic bias that tends to induce underinvestment.
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Bibliographic InfoPaper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/11439.
Date of creation: 2013
Date of revision:
Publication status: Published in Journal of Economics and Management Strategy, 2013, Vol. 22, no. 1. pp. 125-139.Length: 14 pages
Assets (accounting); profit; gas industry; spot prices; suppliers; natural gas;
Find related papers by JEL classification:
- L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ACC-2013-11-16 (Accounting & Auditing)
- NEP-ALL-2013-11-16 (All new papers)
- NEP-CFN-2013-11-16 (Corporate Finance)
- NEP-COM-2013-11-16 (Industrial Competition)
- NEP-IND-2013-11-16 (Industrial Organization)
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