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When Market Competition Benefits Firms

  • 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)

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.

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Paper provided by Osaka School of International Public Policy, Osaka University in its series OSIPP Discussion Paper with number 08E011.

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Length: 29 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:osp:wpaper:08e011
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