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When Market Competition Benefits Firms

Author

Listed:
  • Junichiro Ishida

    (Osaka School of International Public Policy (OSIPP),Osaka University)

  • Toshihiro Matsumura

    (Institute of Social Science, University of Tokyo)

  • Noriaki Matsushima

    (Graduate School of Business Administration, Kobe University)

Abstract

A conventional wisdom in economics posits that more intense market competition, measured in almost any way, reduces firm profit. In this paper, we challenge this conventional wisdom in a simple Cournot model with strategic R&D investments wherein an efficient firm (dominant firm) competes against less efficient firms (fringe firms). We find that an increase in the number of fringe firms can stimulate R&D by the dominant firm, while it always reduces R&D by each of the fringe firms. More importantly, this force can be strong enough to compensate for the loss that arises from more intense market competition: the dominant firm's profit may indeed increase with the number of fringe firms, quite contrary to the conventional wisdom. An implication of this result is far-reaching, as it gives dominant firms to help, rather than harm, fringe competitors. We relate this implication to a practice know as open knowledge disclosure, especially Ford's strategy of disclosing its know-how publicly and extensively at the beginning of the 20th century.

Suggested Citation

  • Junichiro Ishida & Toshihiro Matsumura & Noriaki Matsushima, 2008. "When Market Competition Benefits Firms," OSIPP Discussion Paper 08E011, Osaka School of International Public Policy, Osaka University.
    • Handle: RePEc:osp:wpaper:08e011
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    File URL: http://www.osipp.osaka-u.ac.jp/archives/DP/2008/DP2008E011.pdf
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    Citations

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    Cited by:

    1. Matsushima, Noriaki & Mizuno, Tomomichi, 2012. "Profit-enhancing competitive pressure in vertically related industries," Journal of the Japanese and International Economies, Elsevier, vol. 26(1), pages 142-152.
    2. Kangsik, Choi, 2009. "Privatization, Government's Preference and Unionization Structure: A Mixed Oligopoly Approach," MPRA Paper 13028, University Library of Munich, Germany.
    3. Matsushima Noriaki & Sato Yasuhiro & Yamamoto Kazuhiro, 2013. "Horizontal Mergers, Firm Heterogeneity, and R&D Investments," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(2), pages 959-990, August.

    More about this item

    Keywords

    competition; oligopoly; R&D; heterogeneity; entry;
    All these keywords.

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