IDEAS home Printed from https://ideas.repec.org/a/ebl/ecbull/eb-25-00398.html

On cost-cutting incentives

Author

Listed:
  • Sreya Kolay

    (University at Albany, SUNY)

Abstract

Reducing costs remains an important objective of business strategy, driving choices such as production process redesign, technology adoption, and outsourcing. This paper examines how the intensity of price competition affects firms' marginal benefits from lowering per-unit variable costs in a differentiated-products duopoly. Applying the conjectural-variations framework, we show that symmetric firms face a non-monotonic relationship between competitive intensity and their marginal benefits from cost reduction. In contrast, when there are significant asymmetries in firms' initial costs, this relationship becomes monotonic, which may differ in directions across competing firms. We also show that while higher competitive intensity increases the social welfare gain from a firm's cost reduction in case of symmetric firms, it can increase or decrease the social welfare change from a firm's cost reduction in case of asymmetric firms.

Suggested Citation

  • Sreya Kolay, 2026. "On cost-cutting incentives," Economics Bulletin, AccessEcon, vol. 46(1), pages 123-132.
    • Handle: RePEc:ebl:ecbull:eb-25-00398
    as

    Download full text from publisher

    File URL: http://www.accessecon.com/Pubs/EB/2026/Volume46/EB-26-V46-I1-P12.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Richard J. Rosen, 1991. "Research and Development with Asymmetric Firm Sizes," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 411-429, Autumn.
    2. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 701-728.
    3. Jan Boone, 2008. "A New Way to Measure Competition," Economic Journal, Royal Economic Society, vol. 118(531), pages 1245-1261, August.
    4. Graf, Christoph & Wozabal, David, 2013. "Measuring competitiveness of the EPEX spot market for electricity," Energy Policy, Elsevier, vol. 62(C), pages 948-958.
    5. Cabral, Luis M. B., 1995. "Conjectural variations as a reduced form," Economics Letters, Elsevier, vol. 49(4), pages 397-402, October.
    6. Mishra, Suryaprakash, 2025. "Cost structures and innovation incentives," Mathematical Social Sciences, Elsevier, vol. 136(C).
    7. Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, vol. 90(358), pages 266-293, June.
    8. Mousavian, Seyedamirabbas & Conejo, Antonio J. & Sioshansi, Ramteen, 2020. "Equilibria in investment and spot electricity markets: A conjectural-variations approach," European Journal of Operational Research, Elsevier, vol. 281(1), pages 129-140.
    9. Dockner, Engelbert J, 1992. "A Dynamic Theory of Conjectural Variations," Journal of Industrial Economics, Wiley Blackwell, vol. 40(4), pages 377-395, December.
    10. Jan Boone, 2008. "A New Way to Measure Competition," Economic Journal, Royal Economic Society, vol. 118(531), pages 1245-1261, August.
    11. Hirose, Kosuke & Matsumura, Toshihiro, 2025. "Optimal energy-saving investments and Jevons Paradox in duopoly markets," Energy Economics, Elsevier, vol. 147(C).
    12. David Genesove & Wallace P. Mullin, 1998. "Testing Static Oligopoly Models: Conduct and Cost in the Sugar Industry, 1890-1914," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 355-377, Summer.
    13. Kristina McElheran & Mu-Jeung Yang & Zachary Kroff & Erik Brynjolfsson, 2025. "The Rise of Industrial AI in America: Microfoundations of the Productivity J-curve(s)," Working Papers 25-27, Center for Economic Studies, U.S. Census Bureau.
    14. Till Fladung & Anna Saile, 2024. "Electricity Prices during the Energy Crisis in Germany: The Role of Market Power," ifo Working Paper Series 414, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    15. Xavier Vives, 2008. "Innovation And Competitive Pressure," Journal of Industrial Economics, Wiley Blackwell, vol. 56(3), pages 419-469, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. François Jeanjean, 2021. "Impact of Technical Progress on the Relationship Between Competition and Investment," Journal of Industry, Competition and Trade, Springer, vol. 21(1), pages 81-101, March.
    2. Rut Atayde & Rafael Garduño & Eduardo Robles & Pluvia Zúñiga, 2021. "Market competition and firm productivity and innovation: Responses in Mexican manufacturing industries," Regional Science Policy & Practice, Wiley Blackwell, vol. 13(4), pages 1185-1214, August.
    3. Boone, J. & van Ours, J.C. & van der Wiel, H.P., 2007. "How (Not) to Measure Competition," Discussion Paper 2007-32, Tilburg University, Center for Economic Research.
    4. Thomas Strobel, 2012. "New evidence on the sources of EU countries’ productivity growth—industry growth differences from R&D and competition," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 39(3), pages 293-325, August.
    5. Jeanjean, François & Houngbonon, Georges Vivien, 2015. "Optimal Number of Firms in the Wireless Markets," 26th European Regional ITS Conference, Madrid 2015 127153, International Telecommunications Society (ITS).
    6. Ghosh, Arghya & Kato, Takao & Morita, Hodaka, 2017. "Incremental innovation and competitive pressure in the presence of discrete innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 135(C), pages 1-14.
    7. Houngbonon, Georges Vivien & Jeanjean, François, 2016. "What level of competition intensity maximises investment in the wireless industry?," Telecommunications Policy, Elsevier, vol. 40(8), pages 774-790.
    8. Norbäck, Pehr-Johan & Persson, Lars, 2012. "Entrepreneurial innovations, competition and competition policy," European Economic Review, Elsevier, vol. 56(3), pages 488-506.
    9. Boone, J. & van Ours, J.C. & van der Wiel, H.P., 2007. "How (Not) to Measure Competition," Discussion Paper 2007-32, Tilburg University, Center for Economic Research.
    10. Boone, J. & Goeree, J.K., 2010. "Optimal Market Design," Discussion Paper 2010-25, Tilburg University, Center for Economic Research.
    11. Rania Missaoui & Aymen Ajina, 2026. "Firm dynamics in corrupt environments: the case of the BRICS countries," SN Business & Economics, Springer, vol. 6(2), pages 1-38, February.
    12. Hallward-Driemeier,Mary C. & Kochanova,Anna & Rijkers,Bob, 2020. "Does Democratization Promote Competition? : Indonesian Manufacturing Pre and Post Suharto," Policy Research Working Paper Series 9112, The World Bank.
    13. Xiangyi Zhou & Zheng Pei & Botao Qin, 2021. "Assessing Market Competition in the Chinese Banking Industry Based on a Conjectural Variation Model," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 29(2), pages 73-98, March.
    14. Tee, Kenny & Syriopoulos, Konstantinos & Rubbaniy, Ghulame & Salim, Amna, 2025. "Asymmetric relationship between competition and innovation: Evidence from banks in the Eurozone," The Journal of Economic Asymmetries, Elsevier, vol. 32(C).
    15. Mayank JAIN, 2023. "Disentangling the Concentration-Performance Nexus: An Empirical Study of Indian-Listed Firms Across Diverse Industries," CECCAR Business Review, Body of Expert and Licensed Accountants of Romania (CECCAR), vol. 4(4), pages 59-72, April.
    16. Ryo Sakamoto & Kyle Stiegert, 2018. "Comparing competitive toughness to benchmark outcomes in retail oligopoly pricing," Agribusiness, John Wiley & Sons, Ltd., vol. 34(1), pages 44-60, December.
    17. David C. Maré & Richard Fabling, 2019. "Competition and productivity: Do commonly used metrics suggest a relationship?," Motu Working Papers 19_16, Motu Economic and Public Policy Research.
    18. Benavente, José Miguel & Zuñiga, Pluvia, 2022. "How Does Market Competition Affect Firm Innovation Incentives in Emerging Countries? Evidence from Chile and Colombia," IDB Publications (Working Papers) 12198, Inter-American Development Bank.
    19. Maman Setiawan, 2023. "Measuring the Competition Index in the Indonesian Manufacturing Industry: The Structure–Conduct–Performance Paradigm," Sustainability, MDPI, vol. 15(15), pages 1-13, July.
    20. Kuessi, Richard & Nantob, N'Yilimon & Aguey, Segnon & Couchoro, Mawuli Kodjovi, 2023. "Competition and banking efficiency in the WAEMU: The role of multinationals and institutions," International Economics, Elsevier, vol. 175(C), pages 45-62.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ebl:ecbull:eb-25-00398. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: John P. Conley (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.