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Does vertical integration reduce investment reluctance in production chains? An agent-based real options approach

  • Balmann, Alfons
  • Musshoff, Oliver
  • Larsen, Karin

This paper uses an agent-based real options approach to analyze whether stronger vertical integration reduces investment reluctance in pork production. A competitive model in which firms identify optimal investment strategies by using genetic algorithms is developed. Two production systems are compared: a perfectly integrated system and a system in which firms produce either the intermediate product (piglets) or the final product (pork). Simulations show that the spot market solution and the perfectly integrated system lead to a very similar production dynamics even with limited information on production capacities. The results suggest that, from a pure real options perspective, spot markets are not significantly inferior to perfectly integrated supply chains.

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File URL: http://purl.umn.edu/59521
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Paper provided by Humboldt University Berlin, Department of Agricultural Economics in its series Structural Change in Agriculture/Strukturwandel im Agrarsektor (SiAg) Working Papers with number 59521.

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Date of creation: Sep 2009
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Handle: RePEc:ags:huscpw:59521
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