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Is there a U-shaped Relation between Competition and Investment?

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  • Dario Sacco

    ()
    (Socioeconomic Institute, University of Zurich)

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    Abstract

    We argue that, in a simple setting, the relation between the intensity of competition and cost-reducing investment is U-shaped. We consider a two-stage game with cost-reducing investments followed by a linear differentiated Cournot duopoly. We first show that, except for firms that are much less efficient than the competitor, investment in the subgame-perfect equilibrium is minimal for intermediate levels of competition, which is inversely parameterized by the extent of product differentiation. An extensive set of laboratory experiments also provides support for the U-shape, both for symmetric firms and for leaders. Also consistent with predictions, the relation is negative for firms that are lagging behind.

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    File URL: http://www.soi.uzh.ch/research/wp/2008/wp0808.pdf
    File Function: first version, 2008
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    Bibliographic Info

    Paper provided by Socioeconomic Institute - University of Zurich in its series SOI - Working Papers with number 0808.

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    Length: 25 pages
    Date of creation: Jul 2008
    Date of revision:
    Handle: RePEc:soz:wpaper:0808

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    Keywords: Investment; intensity of competition; experiment;

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