Jointly Held Investment Options and Vertical Relationships

Abstract

AbstractWe find the optimal time for exercising a jointly held investment option. When the input market is competitive, the investment can take place earlier, later, or exactly when the optimal investment threshold is reached depending on how the option holders interact and on the bargaining power distribution. When instead the input supplier has market power, the game-theoretic framework downstream is shown to be of secondary importance. The timing effect that is attributed to the vertical relationship is always prevailing, which dictates the inefficient postponement of the investment.