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Advance-Purchase Financing of Projects with Few Buyers

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  • Sahm, Marco

Abstract

I investigate a simple model of advance-purchase contracts as a mode of financing costly projects. The analysis can easily be reinterpreted as a model of monopolistic provision of excludable public goods under private information. An entrepreneur has to meet some capital requirement in order to start production and sell the related good to a limited number of potential buyers who are privately informed about their willingness to pay. I find that advance-purchase arrangements allow to finance more costly projects than traditional funding sources. The entrepreneur is able to use advance-purchase surcharges as a price discrimination device. However, the discriminatory power is limited by the problem of free-riding which aggravates for an increasing number of potential buyers. I apply the model to research and development activities in the health industry discussing the availability of new drugs and vaccines in poor countries.

Suggested Citation

  • Sahm, Marco, 2015. "Advance-Purchase Financing of Projects with Few Buyers," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113122, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc15:113122
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    References listed on IDEAS

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    Cited by:

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    More about this item

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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