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Is there a U-shaped Relation between Competition and Investment?

Author

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  • Dario Sacco

    () (Socioeconomic Institute, University of Zurich)

Abstract

We argue that, in a simple setting, the relation between the intensity of competition and cost-reducing investment is U-shaped. We consider a two-stage game with cost-reducing investments followed by a linear differentiated Cournot duopoly. We first show that, except for firms that are much less efficient than the competitor, investment in the subgame-perfect equilibrium is minimal for intermediate levels of competition, which is inversely parameterized by the extent of product differentiation. An extensive set of laboratory experiments also provides support for the U-shape, both for symmetric firms and for leaders. Also consistent with predictions, the relation is negative for firms that are lagging behind.

Suggested Citation

  • Dario Sacco, 2008. "Is there a U-shaped Relation between Competition and Investment?," SOI - Working Papers 0808, Socioeconomic Institute - University of Zurich.
  • Handle: RePEc:soz:wpaper:0808
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    File URL: http://www.econ.uzh.ch/static/wp_soi/wp0808.pdf
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    More about this item

    Keywords

    Investment; intensity of competition; experiment;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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