Topic: Flexibility of Investments as a Solution to Hold-Up

Lecturer: Prof. Youping Li, School of Business Administration, South China University of Technology

Time: 15:30-17:00 p.m. June 15th, 2023

Venue: Tencent Conference 708798386

Abstract: It is usually believed that there exists a hold - up problem between vertically related firms as the downstream producer's investment is typically irreversible when the upstream supplier sets the input price. This paper investigates the hold-up problem in the context of linear pricing, and whether investment flexibility can mitigate its impacts. We find that, while downstream profit is always weakly lower, if the convexity of marginal revenue in the downstream market is below (or above) one, flexibility of investments leads to an increase (or decrease) in the level of investment, upstream profit, consumer and total welfare, compared to situations without such flexibility.