Does vertical integration reduce investment reluctance in production chains?
) and Karin Larsen No 59521, Structural Change in Agriculture/Strukturwandel im Agrarsektor (SiAg) Working Papers from Humboldt University Berlin, Institute for Agricultural Economics and Social Sciences Abstract: This paper uses an agent-based real options approach to analyze whether stronger vertical integration reduces investment reluctance in pork production. A competitive model in which firms identify optimal investment strategies by using genetic algorithms is developed. Two production systems are compared: a perfectly integrated system and a system in which firms produce either the intermediate product (piglets) or the final product (pork). Simulations show that the spot market solution and the perfectly integrated system lead to a very similar production dynamics even with limited information on production capacities. The results suggest that, from a pure real options perspective, spot markets are not significantly inferior to perfectly integrated supply chains. Keywords: real
