Investment and Coordination in Oligopolistic Industries
We examine investment by firms in 24 chemical product industries to determine whether firms invest preemptively to achieve persistent increases in market share or whether there is evidence of behavior to maintain market share. The data indicate that investment reduces the probability that rival firms will expand capacity, but the effect is temporary. Large firms tend to maintain market share, while smaller firms tend to invest simultaneously with rivals. The role of preemptive investment is limited to that of permitting a firm to invest with a lower probability of redundant investment by rivals. Preemption does not allow a persistent increase in market share, but instead acts as a means by which firms may coordinate capacity investment to help avoid episodes of industry overcapacity.
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