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Innovation and the Emergence of Market Dominance

Author

Listed:
  • Susan Athey
  • Armin Schmutzler

Abstract

This paper analyzes a model of oligopolistic competition with ongoing investment. It incorporates the following models as special cases: incremental investment, patent races, learning-by-doing, and network externalities. We investigate circumstances under which a firm with low costs or high quality will extend its initial lead through further cost-reducing or quality-improving investments. In many commonly-studied oligopoly games, such investments are strategic substitutes. We derive a new comparative statics result that applies to games with strategic substitutes, and we use the result to derive conditions under which leading firms invest more than lagging firms. We show that the conditions are satisfied in a variety of commonly-studied oligopoly models. We also highlight plausible countervailing effects from two distinct sources. First, leading firms may find it more costly than others to achieve the same increment to their state. This force is particularly salient inmany models of patentn races, where firms make research investments in an attempt to find a new technology that delivers a given level of cost or quality. Second, countervailing effects may arise in dynamic games with more than two firms are sufficiently patient.
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Suggested Citation

  • Susan Athey & Armin Schmutzler, 1999. "Innovation and the Emergence of Market Dominance," Working papers 99-18, Massachusetts Institute of Technology (MIT), Department of Economics.
    • Handle: RePEc:mit:worpap:99-18
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    Cited by:

    1. Leiponen, Aija, . "Essays in the Economics of Knowledge: Innovation, Collaboration, and Organizational Complementarities," ETLA A, The Research Institute of the Finnish Economy, number 31, June.
    2. Luis M. B. Cabral, 2000. "Dynamic Competition with No Efficiency Effect," Econometric Society World Congress 2000 Contributed Papers 0512, Econometric Society.
    3. Leandro Arozamena & Estelle Cantillon, 2004. "Investment Incentives in Procurement Auctions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(1), pages 1-18.
    4. Cabral, Luis M. B., 2002. "Increasing Dominance with No Efficiency Effect," Journal of Economic Theory, Elsevier, vol. 102(2), pages 471-479, February.
    5. Von der Fehr, Nils-Henrik M. & Fabra, Natalia & de Frutos, Maria-Angeles, 2008. "Investment Incentives and Auction Design in Electricity Markets," CEPR Discussion Papers 6626, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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