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Understanding the Dynamics of Value Chains with Irreversible Investments

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  • Lionel COSNARD

Abstract

This paper develops an original theoretical framework for the dynamic modeling and analysis of value chains with irreversible investments. Using a recursive model of a 2-stages value chain, it shows in a simple way how economies of scale, agents' expectations, market structure, capital durability and access to capital shape the dynamic behavior of value chains. Depending on these characteristics, value chains with irreversible investments can display multiple steady-state equilibria, stable cyclical regimes or hysteretic behaviors. The consequences on the resilience of value chains of the age of capital and their isolation from the rest of the economy are also highlighted. Finally, we discuss the importance of coordination issues in the dynamics of value chains.

Suggested Citation

  • Lionel COSNARD, 2020. "Understanding the Dynamics of Value Chains with Irreversible Investments," Bordeaux Economics Working Papers 2020-02, Bordeaux School of Economics (BSE).
    • Handle: RePEc:grt:bdxewp:2020-02
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    File URL: http://bordeauxeconomicswp.u-bordeaux.fr/2020/2020-02.pdf
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    More about this item

    Keywords

    Value-chains; Irreversible investments; Coordination; Resilience; Hysteresis; Recursive dynamic;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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