A profit sharing scheme for a two-firm joint venture

Li DU, Qiying HU, Liming LIU

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

8 Citations (Scopus)

Abstract

Consider the scenario when two firms are setting up a joint venture. One firm has a set of technologies and knowhow for a new product while the other contributes the necessary capital for setting up and running the venture. The key issue that the two firms face in negotiating the joint venture is to determine a fair value for the technologies and knowhow. This paper presents an approach by which each firm bids a price for the technology with an objective to maximize their own profits from the joint venture. Provided that their bids satisfy a cooperation condition, the two firms settle on a price using a simple valuation formula. We analyze the impact of various factors on the decision process and provide numerical results to illustrate the bidding strategies. We conclude that in order to maximize their profits, it is often more important for both firms to increase the chance of cooperation than to increase their own shares of the joint venture.
Original languageEnglish
Pages (from-to)277-292
Number of pages16
JournalEuropean Journal of Operational Research
Volume170
Issue number1
DOIs
Publication statusPublished - 1 Jan 2006
Externally publishedYes

Fingerprint

Profit
Profitability
Sharing
Maximise
Bidding
Valuation
Business
Joint ventures
Profit sharing
Numerical Results
Scenarios
Necessary
Bid

Keywords

  • Joint venture; Profit sharing; Technology; Auction

Cite this

@article{773c5583e1ab45c7b1f9f3d9594fdc66,
title = "A profit sharing scheme for a two-firm joint venture",
abstract = "Consider the scenario when two firms are setting up a joint venture. One firm has a set of technologies and knowhow for a new product while the other contributes the necessary capital for setting up and running the venture. The key issue that the two firms face in negotiating the joint venture is to determine a fair value for the technologies and knowhow. This paper presents an approach by which each firm bids a price for the technology with an objective to maximize their own profits from the joint venture. Provided that their bids satisfy a cooperation condition, the two firms settle on a price using a simple valuation formula. We analyze the impact of various factors on the decision process and provide numerical results to illustrate the bidding strategies. We conclude that in order to maximize their profits, it is often more important for both firms to increase the chance of cooperation than to increase their own shares of the joint venture.",
keywords = "Joint venture; Profit sharing; Technology; Auction",
author = "Li DU and Qiying HU and Liming LIU",
year = "2006",
month = "1",
day = "1",
doi = "10.1016/j.ejor.2004.06.025",
language = "English",
volume = "170",
pages = "277--292",
journal = "European Journal of Operational Research",
issn = "0377-2217",
publisher = "Elsevier",
number = "1",

}

A profit sharing scheme for a two-firm joint venture. / DU, Li; HU, Qiying; LIU, Liming.

In: European Journal of Operational Research, Vol. 170, No. 1, 01.01.2006, p. 277-292.

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

TY - JOUR

T1 - A profit sharing scheme for a two-firm joint venture

AU - DU, Li

AU - HU, Qiying

AU - LIU, Liming

PY - 2006/1/1

Y1 - 2006/1/1

N2 - Consider the scenario when two firms are setting up a joint venture. One firm has a set of technologies and knowhow for a new product while the other contributes the necessary capital for setting up and running the venture. The key issue that the two firms face in negotiating the joint venture is to determine a fair value for the technologies and knowhow. This paper presents an approach by which each firm bids a price for the technology with an objective to maximize their own profits from the joint venture. Provided that their bids satisfy a cooperation condition, the two firms settle on a price using a simple valuation formula. We analyze the impact of various factors on the decision process and provide numerical results to illustrate the bidding strategies. We conclude that in order to maximize their profits, it is often more important for both firms to increase the chance of cooperation than to increase their own shares of the joint venture.

AB - Consider the scenario when two firms are setting up a joint venture. One firm has a set of technologies and knowhow for a new product while the other contributes the necessary capital for setting up and running the venture. The key issue that the two firms face in negotiating the joint venture is to determine a fair value for the technologies and knowhow. This paper presents an approach by which each firm bids a price for the technology with an objective to maximize their own profits from the joint venture. Provided that their bids satisfy a cooperation condition, the two firms settle on a price using a simple valuation formula. We analyze the impact of various factors on the decision process and provide numerical results to illustrate the bidding strategies. We conclude that in order to maximize their profits, it is often more important for both firms to increase the chance of cooperation than to increase their own shares of the joint venture.

KW - Joint venture; Profit sharing; Technology; Auction

UR - http://commons.ln.edu.hk/sw_master/4083

U2 - 10.1016/j.ejor.2004.06.025

DO - 10.1016/j.ejor.2004.06.025

M3 - Journal Article (refereed)

VL - 170

SP - 277

EP - 292

JO - European Journal of Operational Research

JF - European Journal of Operational Research

SN - 0377-2217

IS - 1

ER -