When Market Competition Benefits Firms
AbstractA conventional wisdom in economics posits that more intense market competition, measured in almost any way, reduces firm profit. In this paper, we challenge this conventional wisdom in a simple Cournot model with strategic R&D investments wherein an efficient firm (dominant firm) competes against less efficient firms (fringe firms). We find that an increase in the number of fringe firms can stimulate R&D by the dominant firm, while it always reduces R&D by each of the fringe firms. More importantly, this force can be strong enough to compensate for the loss that arises from more intense market competition: the dominant firm's profit may indeed increase with the number of fringe firms, quite contrary to the conventional wisdom. An implication of this result is far-reaching, as it gives dominant firms to help, rather than harm, fringe competitors. We relate this implication to a practice know as open knowledge disclosure, especially Ford's strategy of disclosing its know-how publicly and extensively at the beginning of the 20th century.
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Bibliographic InfoPaper provided by Osaka School of International Public Policy, Osaka University in its series OSIPP Discussion Paper with number 08E011.
Length: 29 pages
Date of creation: Sep 2008
Date of revision:
competition; oligopoly; R&D; heterogeneity; entry;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-09-29 (All new papers)
- NEP-BEC-2008-09-29 (Business Economics)
- NEP-COM-2008-09-29 (Industrial Competition)
- NEP-IND-2008-09-29 (Industrial Organization)
- NEP-MIC-2008-09-29 (Microeconomics)
- NEP-TID-2008-09-29 (Technology & Industrial Dynamics)
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