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Market Microstructure and Incentives to Invest

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  • Daniel F. Spulber

Abstract

Market organization significantly affects total output and incentives for firms to invest. I compare three types of market organization. In a market with search and random matching, total output is excessive and there are incentives for inefficient underinvestment. In a market with a monopoly dealer, total output is insufficient and underinvestment also occurs. Competition between the search market and the dealer market improves incentives to invest, and competition between dealers yields efficient total output and investment. This suggests that additional entry of wholesalers and other interbusiness dealers should stimulate aggregate business investment.

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  • Daniel F. Spulber, 2002. "Market Microstructure and Incentives to Invest," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 352-381, April.
  • Handle: RePEc:ucp:jpolec:v:110:y:2002:i:2:p:352-381
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    File URL: http://dx.doi.org/10.1086/338749
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    References listed on IDEAS

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    1. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
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    Cited by:

    1. Belleflamme, Paul & Peitz, Martin, 2010. "Platform competition and seller investment incentives," European Economic Review, Elsevier, vol. 54(8), pages 1059-1076, November.
    2. Inderst, Roman & Wey, Christian, 2007. "Buyer power and supplier incentives," European Economic Review, Elsevier, vol. 51(3), pages 647-667, April.
    3. Spulber, Daniel F., 2012. "Tacit knowledge with innovative entrepreneurship," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 641-653.
    4. Heidrun C. Hoppe & Emre Ozdenoren, 2002. "Intermediation in Innovation," CIG Working Papers FS IV 02-11, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    5. BELLEFLAMME, Paul & PEITZ, Martin, 2006. "Intermediation and investment incentives," CORE Discussion Papers 2006094, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    6. Etro, Federico, 2016. "Research in economics and industrial organization," Research in Economics, Elsevier, vol. 70(4), pages 511-517.
    7. Nadia Burani, 2008. "Matching, search and intermediation with two-sided heterogeneity," Review of Economic Design, Springer;Society for Economic Design, vol. 12(2), pages 75-117, June.
    8. Antonio Nicita & Massimiliano Vatiero, 2014. "Dixit versus Williamson: the ‘fundamental transformation’ reconsidered," European Journal of Law and Economics, Springer, vol. 37(3), pages 439-453, June.
    9. Karla Atkins & Achla Marathe & Chris Barrett, 2007. "A computational approach to modeling commodity markets," Computational Economics, Springer;Society for Computational Economics, vol. 30(2), pages 125-142, September.
    10. Tara Mitchell, 2014. "Is Knowledge Power? Competition and Information in Agricultural Markets," The Institute for International Integration Studies Discussion Paper Series iiisdp456, IIIS.

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