 How do upstream competition and supply shocks affect investment decisions?Benoît Chevalier-Roignant and Stéphane Villeneuve No 26-1702, TSE Working Papers from Toulouse School of Economics (TSE) 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) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:131302 Access Statistics for this paper More papers in TSE Working Papers from Toulouse School of Economics (TSE) Contact information at EDIRC. |
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