How do upstream competition and supply shocks affect investment decisions ?

Benoît Chevalier-Roignant and Stéphane Villeneuve
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Benoît Chevalier-Roignant: Unknown
Stéphane Villeneuve: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, TSM - Toulouse School of Management - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse

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Abstract: We study the effect of upstream competition and supply shocks on a buyer's investment decisions, under demand uncertainty. Imperfect upstream competition leads to double marginalization. This effect is mitigated if the supplier pool is larger (when production costs are linear or in case of diseconomies of scale): The resulting lower equilibrium input price ultimately benefits the buyer and makes it more likely to invest sooner. A supply shock—that shrinks the supplier base—may increase the market power of the remaining suppliers and exacerbate double marginalization. Such a shock may arise either exogenously (due to a sudden external event) or endogenously (when profitability upstream is reduced). An exogenous shock, which leads to higher input prices and lower order quantities, reduces the profitability of the buyer, which is then less inclined to invest if more suppliers are affected by it. When the shock arises endogenously, the buyer may be better off and invest sooner if it subsidizes its supplier base as a way to maintain more competition upstream.

Keywords: Supply shock; supply chain; real options (search for similar items in EconPapers)
Date: 2026-02-04
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