Management Accounting Section Midyear Meeting

The Effect of Market Concern on Specific Investments in the Supply Chain

• In Event: Analytical Models II

Abstract

The financial market gives significant consideration to supply chain activities of publicly-listed firms, who could in turn use their investments in the supply chain to manipulate market expectations. We study the effects of the market concern of a publicly-traded retailer that collaborates with a privately-owned supplier in a supply chain. The firms each undertake a relation-specific investment and then bargain over the joint surplus generated by the collaboration. The retailer's market concern increases its stake in the collaboration, which makes it a more aggressive bargainer, and able to obtain a higher share of the joint surplus. The investments of both firms increase with the retailer's market concern when the retailer's investment is sufficiently important for the collaboration. In this case, the retailer benefits from its market concern. When the supplier's investment is sufficiently important, both firms decrease their investments and the retailer suffers from its market concern. From the perspective of the whole supply chain, the retailer's market concern could mitigate or exacerbate the hold-up problem between the two firms and thus could be either beneficial or detrimental. In an extension, we discuss the case of two symmetric firms that are both publicly traded and show that a certain degree of market concern is beneficial for the firms and the whole supply chain.

Authors

• Hui Chen, University of Zurich

• Thomas Pfeiffer, University of Vienna