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A Note on Fat Cats and Puppy Dogs

Author

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  • Thomas VON UNGERN-STERNBERG

Abstract

This paper studies under what circumstances an incumbent has an incentive to over-invest in a "commitment variable" such as advertising or R&D expenditures. It is sometimes argued that the answer crucially depends on the question, wether the "second stage variables" are strategic complements or substitutes. We show that in the derivation of this result the authors implicitly make the (very) restrictive assumption that the first stage "commitment variable" has no direct effect on the competitor's reaction function. Once this assumption is relaxed the clear cut distinction along the lines "strategic complements", "strategic substitutes" no longer holds.

Suggested Citation

  • Thomas VON UNGERN-STERNBERG, 1999. "A Note on Fat Cats and Puppy Dogs," Cahiers de Recherches Economiques du Département d'économie 9913, Université de Lausanne, Faculté des HEC, Département d’économie.
    • Handle: RePEc:lau:crdeep:9913
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    File URL: http://www.hec.unil.ch/deep/textes/9913.pdf
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    More about this item

    Keywords

    strategic substitutes and complements; Tirole;

    JEL classification:

    • L00 - Industrial Organization - - General - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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