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

Christian Trudeau and Zheng Wang ()
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Zheng Wang: Capital University of Business and Economics

No 1706, Working Papers from University of Windsor, Department of Economics

Abstract: 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.

Keywords: Value capture; expansion; bargaining power; core (search for similar items in EconPapers)
JEL-codes: C71 C78 L13 L25 M11 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2017-08
New Economics Papers: this item is included in nep-com, nep-gth, nep-ind and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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