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Real Asset Valuation under Imperfect Competition: Can We Forget About Market Fundamentals?
Author(s) -
Chaton Corinne,
DurandViel Laure
Publication year - 2013
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/jems.12005
Subject(s) - valuation (finance) , oligopoly , economics , imperfect competition , microeconomics , asset (computer security) , industrial organization , perfect competition , market price , financial economics , business , cournot competition , finance , computer security , computer science
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.