The Burden of Excellence: Endogenous efficiency paradoxes under coopetition

We analyze a two-stage duopoly where rivals first make non-cooperative demand-expanding investments yielding non-excludable benefits and then compete in product markets. Two efficiency paradoxes emerge endogenously. First, when production technologies are identical, firms with less efficient investment technology earn higher profits. Second, firms disadvantaged in both production and investment can outperform superior rivals. The mechanism is that market-expanding investments benefit all firms while costs fall disproportionately on efficient investors, enabling inefficient firms to free-ride. These paradoxes persist across product differentiation, simultaneous timing, and alternative aggregation technologies. Subsidies intended to remedy market failures paradoxically exacerbate efficiency reversals. While efficiency heterogeneity enhances short-run welfare through complementary effects, it may undermine long-run market selection, potentially causing inefficient monopolization. Our framework applies to brand advertising, platform development, standard-setting, and industry reputation, revealing fundamental tensions between static welfare gains and dynamic efficiency, with implications for competition policy and strategic management in coopetitive markets.