Incentives to Invest in Electronic Coordination: Under- or Overinvestment in Equilibrium?
AbstractDo firms have proper incentives to invest in electronic coordination? We discuss this question in an oligopoly model with a local firm and a distant competitor that may reduce transport costs by investing in electronic coordination. In a two-stage game with investment in the first stage and price or quantity competition with differentiated products in the second stage we compare profit maximizing investment with (constrained) welfare maximization by a social planer. Depending on market demand, firm conduct and investment costs either over- or underinvestment may result: The firm will overinvest if the negative impact on its competitor exceeds the gain in consumer surplus. This is shown to be especially likely under quantity competition with (almost) homogenous products.
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Bibliographic InfoPaper provided by Universitaet Augsburg, Institute for Economics in its series Discussion Paper Series with number 200.
Date of creation: Mar 2001
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More information through EDIRC
Electronic Markets; Strategic Investments; Transport Costs; Product Differentiation;
Find related papers by JEL classification:
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
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