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Real Asset Valuation under Imperfect Competition: Can We Forget About Market Fundamentals?

Real Asset Valuation under Imperfect Competition: Can We Forget About Market Fundamentals? Real assets are usually valued by computing the stream of profits they can bring to a price‐taking firm in a liquid market. This method ignores market fundamentals by assuming that all the relevant information is included in the spot price. Our article analyses the bias resulting from such an approach when the market is imperfectly competitive. We propose a stylised two‐period model of the natural gas market with no uncertainty, focusing on strategic interactions between two types of oligopolistic players—pure traders and suppliers with downstream customers—who have access to storage. We show that the true value of storage capacity is not the same for traders and for suppliers. Comparing the latter value with the traditional price‐taking valuation reveals a systematic bias that tends to induce underinvestment. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economics & Management Strategy Wiley

Real Asset Valuation under Imperfect Competition: Can We Forget About Market Fundamentals?

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References (17)

Publisher
Wiley
Copyright
© 2013 Wiley Periodicals, Inc.
ISSN
1058-6407
eISSN
1530-9134
DOI
10.1111/jems.12005
Publisher site
See Article on Publisher Site

Abstract

Real assets are usually valued by computing the stream of profits they can bring to a price‐taking firm in a liquid market. This method ignores market fundamentals by assuming that all the relevant information is included in the spot price. Our article analyses the bias resulting from such an approach when the market is imperfectly competitive. We propose a stylised two‐period model of the natural gas market with no uncertainty, focusing on strategic interactions between two types of oligopolistic players—pure traders and suppliers with downstream customers—who have access to storage. We show that the true value of storage capacity is not the same for traders and for suppliers. Comparing the latter value with the traditional price‐taking valuation reveals a systematic bias that tends to induce underinvestment.

Journal

Journal of Economics & Management Strategy – Wiley

Published: Mar 1, 2013

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