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Real Asset Valuation under Imperfect Competition: Can We Forget About Market Fundamentals?

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  • Corinne Chaton
  • Laure Durand‐Viel

Abstract

Real 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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  • Corinne Chaton & Laure Durand‐Viel, 2013. "Real Asset Valuation under Imperfect Competition: Can We Forget About Market Fundamentals?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(1), pages 125-139, March.
    • Handle: RePEc:bla:jemstr:v:22:y:2013:i:1:p:125-139
    DOI: jems.12005
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    Cited by:

    1. Robert A. Ritz, 2013. "Price discrimination and limits to arbitrage in global LNG markets," Working Papers EPRG 1317, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    2. James Cruise & Lisa Flatley & Richard Gibbens & Stan Zachary, 2019. "Control of Energy Storage with Market Impact: Lagrangian Approach and Horizons," Operations Research, INFORMS, vol. 67(1), pages 1-9, January.
    3. Ritz, Robert A., 2014. "Price discrimination and limits to arbitrage: An analysis of global LNG markets," Energy Economics, Elsevier, vol. 45(C), pages 324-332.
    4. Secomandi, Nicola & Seppi, Duane J., 2014. "Real Options and Merchant Operations of Energy and Other Commodities," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 6(3-4), pages 161-331, July.

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