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Is there a U-shaped relation between competition and investment?

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Listed author(s):
  • Sacco, Dario
  • Schmutzler, Armin

Abstract

We consider a two-stage game with cost-reducing investments followed by a linear differentiated Cournot duopoly. With competition inversely parameterized by the extent of product differentiation, investment in the subgame perfect equilibrium is typically minimal for intermediate levels of competition. Laboratory experiments partly confirm the U-shape in a reduced one-stage version of the game. In the two-stage version, there is no evidence for positive effects of moving from intermediate to intense competition.

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File URL: http://www.sciencedirect.com/science/article/pii/S0167-7187(09)00088-5
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Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 29 (2011)
Issue (Month): 1 (January)
Pages: 65-73

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Handle: RePEc:eee:indorg:v:29:y:2011:i:1:p:65-73
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

Keywords: Investment Intensity of competition Experiment Reciprocity;

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  1. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 701-728.
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  3. Donja Darai & Dario Sacco & Armin Schmutzler, 2010. "Competition and innovation: an experimental investigation," Experimental Economics, Springer;Economic Science Association, vol. 13(4), pages 439-460, December.
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  7. Mason, Charles F & Phillips, Owen R & Nowell, Clifford, 1992. "Duopoly Behavior in Asymmetric Markets: An Experimental Evaluation," The Review of Economics and Statistics, MIT Press, vol. 74(4), pages 662-670, November.
  8. Engelmann, Dirk & Normann, Hans-Theo, 2007. "An experimental test of strategic trade policy," Journal of Economic Behavior & Organization, Elsevier, vol. 64(1), pages 144-156, September.
  9. Isaac, R. Mark & Reynolds, Stanley S., 1992. "Schumpeterian competition in experimental markets," Journal of Economic Behavior & Organization, Elsevier, vol. 17(1), pages 59-100, January.
  10. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
  11. Halbheer, Daniel & Fehr, Ernst & Goette, Lorenz & Schmutzler, Armin, 2009. "Self-reinforcing market dominance," Games and Economic Behavior, Elsevier, vol. 67(2), pages 481-502, November.
  12. R. Mark Isaac & Stanley S. Reynolds, 1988. "Appropriability and Market Structure in a Stochastic Invention Model," The Quarterly Journal of Economics, Oxford University Press, vol. 103(4), pages 647-671.
  13. Huck, Steffen & Normann, Hans-Theo & Oechssler, Jorg, 2004. "Two are few and four are many: number effects in experimental oligopolies," Journal of Economic Behavior & Organization, Elsevier, vol. 53(4), pages 435-446, April.
  14. Oechssler, Jorg & Schuhmacher, Frank, 2004. "The limited liability effect in experimental duopoly markets," International Journal of Industrial Organization, Elsevier, vol. 22(2), pages 163-184, February.
  15. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
  16. Athey, Susan & Schmutzler, Armin, 2001. "Investment and Market Dominance," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 1-26, Spring.
  17. Armin Schmutzler, 2007. "The relation between competition and innovation � Why is it such a mess?," SOI - Working Papers 0716, Socioeconomic Institute - University of Zurich, revised Jan 2010.
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