复旦大学管理学院现代产业经济学系列讲座第93期

On the Timing of Vertical Relationships

Professor Bruno Versaevel
EMLYON Business School, France

Time: April 14 2011, Thursday, 13:30 – 15:00
Venue: 502 Starring Building (史带楼502)
Chair: Dr Pei SUN (孙霈 副教授)

Abstract

In a real options model, we show that the standard analysis of vertical relationships transposes directly to investment timing. Thus, when a firm undertaking a project requires an outside supplier (e.g., an equipment manufacturer) to provide it with a discrete input to serve a growing but uncertain demand, and if the supplier has market power, investment occurs too late from an industry standpoint. The distortion in firm decisions is characterized by a Lerner-type index, and we show how market growth rate and volatility affect the extent of the distortion. If the initial market demand is high, greater volatility increases the effective investment cost, and results in lower value for both firms. Vertical restraints can restore efficiency. For instance, the upstream firm can induce entry at the correct investment threshold by selling a call option on the input. Otherwise, if two downstream firms are engaged in a preemption race, the upstream firm sells the input to the first investor at a discount which is chosen in such a way that the race to preempt exactly offsets the vertical distortion, and this leader invests at the optimal time.

Biographical Sketch

Bruno Versaevel is Associate Professor of Economics at EMLYON Business School, where he was head of the ‘Economics, Finance, Control’ department from 2006 to 2010. He is also an adjunct researcher at GATE (CNRS). He received an MSc from the University of Manchester (UK) and a doctorate from the European University Institute (Italy). In both his teaching and his research he concentrates on industrial organization, with a special interest in the economics of R&D and competition policy.