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Investment Dynamics in Markets with Endogenous Demand

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  • Vettas, Nikolaos

Abstract

In several interesting markets, demand is an increasing function of past sales because of learning, network externalities or fashion. This paper examines entry into such markets. The two key elements of the model are that firms are uncertain about the demand (and learn in a Bayesian fashion) and that demand grows endogenously over time. The capacity expansion path of the competitive market is compared with the planning/monopoly solution. These paths differ not only with respect to levels (the market's investment is too low), but also with respect to their time patterns (externalities may lead to S-shaped diffusion). This framework provides some justification for industrial or trade policy arguments for subsidizing entry into new markets, especially for infant-export industries. The markets examined also exhibit path-dependence: small initial differences in demand conditions may lead either to an established market or a non-existing one.

Suggested Citation

  • Vettas, Nikolaos, 1998. "Investment Dynamics in Markets with Endogenous Demand," CEPR Discussion Papers 1994, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1994
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    Cited by:

    1. Olivier Cadot & Céline Carrère & Vanessa Strauss-Kahn, 2011. "Export Diversification: What's behind the Hump?," The Review of Economics and Statistics, MIT Press, vol. 93(2), pages 590-605, May.
    2. Toker Doganoglu, 2003. "Dynamic Price Competition with Consumption Externalities," Netnomics, Springer, vol. 5(1), pages 43-69, May.
    3. Kotseva, Rossitsa & Vettas, Nikolaos, 2005. "Foreign Direct Investment and Exports Dynamics with Demand Learning," CEPR Discussion Papers 5262, C.E.P.R. Discussion Papers.
    4. Geroski, P. A., 2000. "Models of technology diffusion," Research Policy, Elsevier, vol. 29(4-5), pages 603-625, April.
    5. Hashimoto, Kaito & Matsubayashi, Nobuo, 2014. "A note on dynamic monopoly pricing under consumption externalities," Economics Letters, Elsevier, vol. 124(1), pages 1-8.
    6. Hiroshi Kitamura & Akira Miyaoka & Misato Sato, 2011. "Free Entry, Market Diffusion, and Social Inefficiency with Endogenously Growing Demand," Discussion Papers in Economics and Business 11-04-Rev, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Nov 2012.
    7. Hanazono, Makoto & Yang, Huanxing, 2009. "Dynamic entry and exit with uncertain cost positions," International Journal of Industrial Organization, Elsevier, vol. 27(3), pages 474-487, May.
    8. Hiroshi Kitamura, 2007. "Capacity Expansion in Markets with Intertemporal Consumption Externalities," Discussion Papers in Economics and Business 07-11, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    9. Óscar Gutiérrez & Francisco Ruiz-Aliseda, 2009. "Entry Patterns Over The Product Life Cycle," Manchester School, University of Manchester, vol. 77(5), pages 594-610, September.
    10. repec:wbk:wbpubs:28040 is not listed on IDEAS
    11. Daniel Lederman & William F. Maloney, 2012. "Does What You Export Matter? In Search of Empirical Guidance for Industrial Policies," World Bank Publications, The World Bank, number 9371, June.
    12. Artuso, A., 2003. "Risk perceptions, endogenous demand and regulation of agricultural biotechnology," Food Policy, Elsevier, vol. 28(2), pages 131-145, April.
    13. Klinger, Bailey & Lederman, Daniel, 2004. "Discovery and development : an empricial exploration of"new"products," Policy Research Working Paper Series 3450, The World Bank.
    14. Zahler, Andrés, 2007. "Decomposing world export growth and the relevance of new destinations," MPRA Paper 30295, University Library of Munich, Germany.
    15. Preeya Mohan, 2016. "Caribbean Diversification and Development," The World Economy, Wiley Blackwell, vol. 39(9), pages 1434-1453, September.
    16. Agosin, Manuel R., 2008. "Export diversification and growth in emerging economies," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), August.
    17. Goya, Daniel, 2014. "Política industrial: Qué es, por qué es necesaria, y su pasado, presente y futuro en Chile
      [Industrial policy: What is it, why it is necessary, and its past, present and future in Chile]
      ," MPRA Paper 64881, University Library of Munich, Germany.
    18. Kitamura, Hiroshi & Miyaoka, Akira & Sato, Misato, 2013. "Free entry, market diffusion, and social inefficiency with endogenously growing demand," Journal of the Japanese and International Economies, Elsevier, vol. 29(C), pages 98-116.
    19. Horvath, Michael & Schivardi, Fabiano & Woywode, Michael, 2001. "On industry life-cycles: delay, entry, and shakeout in beer brewing," International Journal of Industrial Organization, Elsevier, vol. 19(7), pages 1023-1052, July.
    20. Christian Volpe Martincus & Antoni Estevadeordal & Andrés Gallo & Jessica Luna, 2010. "Information Barriers, Export Promotion Institutions, and the Extensive Margin of Trade," IDB Publications (Working Papers) 3185, Inter-American Development Bank.
    21. Bailey Klinger, 2007. "Uncertainty in the Search for New Exports," CID Working Papers 16, Center for International Development at Harvard University.
    22. Hiroshi Kitamura, 2010. "Capacity Expansion In Markets With Inter-Temporal Consumption Externalities," Australian Economic Papers, Wiley Blackwell, vol. 49(2), pages 127-148, June.
    23. Altomonte, Carlo & Pennings, Enrico, 2008. "Learning from foreign investment by rival firms: Theory and evidence," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1203-1217, September.
    24. Christian Volpe Martincus & Antoni Estevadeordal & Andrés Gallo & Jessica Luna, 2010. "Information Barriers, Export Promotion Institutions, and the Extensive Margin of Trade," IDB Publications (Working Papers) 39358, Inter-American Development Bank.

    More about this item

    Keywords

    diffusion paths; infant industries; Network Externalities; New products; Path Dependence;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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