Should the most efficient firm invest in its capacity? A value capture approach
Recently, cooperative game theory and the stand-alone core have been introduced to value capture theory to establish lower and upper bounds on the profits of firms. Where within these bounds firms end up depends on many unobservable factors, including individual bargaining abilities and market-specific practices. Gans and Ryall (2017), in their survey of the recent papers using this theory, provide an example of a matching market in which the firm with the cost advantage might actually be worse off when it decides to expand its capacity to take over the full market. We show that this paradox is extremely persistent and can resist to most extensions of the model, including the presence of additional buyers that were not served originally and economies of scale for the expanding firm. By expanding, the firm now has to attract more consumers, which considerably limits its bargaining power.
|Date of creation:||Aug 2017|
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- Glenn MacDonald & Michael D. Ryall, 2004. "How Do Value Creation and Competition Determine Whether a Firm Appropriates Value?," Management Science, INFORMS, vol. 50(10), pages 1319-1333, October.
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