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United We Stand? Coordinating Capacity Investment and Allocation in Joint Ventures

33 Pages Posted: 26 Jun 2013  

Guillaume Roels

University of California, Los Angeles (UCLA) - Decisions, Operations, and Technology Management (DOTM) Area

Philippe Chevalier

Catholic University of Louvain (UCL)

Ying Wei

Jinan University - Management School

Date Written: September 30, 2012

Abstract

Among the recent innovative strategies for coping with product variety and market risk some firms have partnered to leverage economies of scale and risk pooling by sharing manufacturing capacity. In this paper we study how to structure such a joint venture to achieve full efficiency at low transaction costs. Specifically, we study whether capacity should be owned jointly or separately. Overall, we find that the two ownership structures have complementary strengths and weaknesses in term of their incentives for coordinating capacity allocation and investment. On the one hand, capacity allocation is simple to coordinate under joint ownership, but may entail high transaction costs under separate ownership when the joint venture consists of many firms with different profit margins. On the other hand, capacity investments remain simple to coordinate under separate ownership, but are efficient under joint ownership only in the presence of large economies of scale or asymmetric demands or asymmetric profit margins, and would otherwise entail high transaction costs. Our analysis thus characterizes the trade-off between economic benefits and transaction costs in the choice of capacity ownership structure.

Keywords: joint ventures, non-cooperative game theory, newsvendor model, economies of scale, capacity ownership

JEL Classification: D20, L20

Suggested Citation

Roels, Guillaume and Chevalier, Philippe and Wei, Ying, United We Stand? Coordinating Capacity Investment and Allocation in Joint Ventures (September 30, 2012). Available at SSRN: https://ssrn.com/abstract=2285246 or http://dx.doi.org/10.2139/ssrn.2285246

Guillaume Roels (Contact Author)

University of California, Los Angeles (UCLA) - Decisions, Operations, and Technology Management (DOTM) Area ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Philippe Chevalier

Catholic University of Louvain (UCL) ( email )

CORE
Voie du Roman Pays, 34
Louvain-la-Neuve, 1348
Belgium

Ying Wei

Jinan University - Management School ( email )

No. 601, West Huangpu Road
Guangzhou, Guangdong 510632
China

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