Title

A profit sharing scheme for a two-firm joint venture

Document Type

Journal article

Source Publication

European Journal of Operational Research

Publication Date

2006

Volume

170

Issue

1

First Page

277

Last Page

292

Keywords

Joint venture; Profit sharing; Technology; Auction

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.

DOI

10.1016/j.ejor.2004.06.025

Print ISSN

03772217

E-ISSN

18726860

Publisher Statement

Copyright © 2004 Elsevier B.V. All rights reserved.

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Recommended Citation

Du, L., Hu, Q., & Liu, L. (2006). A profit sharing scheme for a two-firm joint venture. European Journal of Operational Research, 170(1), 277-292. doi: 10.1016/j.ejor.2004.06.025