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Should the most efficient firm invest in its capacity? A value capture approach

Listed author(s):
  • Christian Trudeau

    ()

    (Department of Economics, University of Windsor)

  • Zheng Wang

    ()

    (Capital University of Business and Economics)

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.

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File URL: http://web2.uwindsor.ca/economics/RePEc/wis/pdf/1706.pdf
File Function: First version, 2017
Download Restriction: no

Paper provided by University of Windsor, Department of Economics in its series Working Papers with number 1706.

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Length: 11 pages
Date of creation: Aug 2017
Handle: RePEc:wis:wpaper:1706
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  1. Haiden A. Huskamp & Richard G. Frank & Kimberly A. McGuigan & Yuting Zhang, 2005. "The Impact of a Three-Tier Formulary on Demand Response for Prescription Drugs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(3), pages 729-753, 09.
  2. Leslie M. Marx & Greg Shaffer, 2010. "Slotting Allowances and Scarce Shelf Space," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(3), pages 575-603, 09.
  3. Tomasz Obloj & Peter Zemsky, 2015. "Value creation and value capture under moral hazard: Exploring the micro-foundations of buyer– supplier relationships," Strategic Management Journal, Wiley Blackwell, vol. 36(8), pages 1146-1163, 08.
  4. Kelso, Alexander S, Jr & Crawford, Vincent P, 1982. "Job Matching, Coalition Formation, and Gross Substitutes," Econometrica, Econometric Society, vol. 50(6), pages 1483-1504, November.
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