Over- and under-investment according to different benchmarks
In a two-stage oligopoly, with investment in the first stage and quantity or price competition in the second stage, there is a kind of Folk Theorem: We find (i) over-investment if the goods are substitutes and competition is in strategic substitutes, (ii) under-investment if we have either complements instead of substitutes or strategic complements instead of strategic substitutes, and (iii) again over-investment if both attributes change. The existing literature, however, lacks a proof of this theorem and, in particular, it lacks a systematic comparison of the different benchmarks for over-and under-investment. A "naive" benchmark is the efficient investment with respect to the subgame perfect (closed loop) equilibrium quantities. Alternative benchmarks (which are more often proposed) are the open loop equilibrium investment or the welfare maximizing investment. The chosen benchmark is critical because the Folk Theorem applies (under certain conventional conditions) only for the naïve benchmark. The other two benchmarks require additional assumptions or the distinction of subcases.
|Date of creation:||2008|
|Date of revision:|
|Contact details of provider:|| Postal: Grosse Scharrnstrasse 59, 15230 Frankfurt (Oder)|
Phone: +49 (0)335 5534 2387
Fax: +49 (0)335 5534 2516
Web page: http://www.wiwi.euv-frankfurt-o.de/en/index.html
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Armin Schmutzler, 2007. "The relation between competition and innovation ï¿½ Why is it such a mess?," SOI - Working Papers 0716, Socioeconomic Institute - University of Zurich, revised Jan 2010.
- Ngo Van Long & Antoine Soubeyran, 1999.
"Cost Manipulation Games in Oligopoly, with Costs of Manipulating,"
CIRANO Working Papers
- Long, Ngo Van & Soubeyran, Antoine, 2001. "Cost Manipulation Games in Oligopoly, with Costs of Manipulating," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(2), pages 505-33, May.
- Masahiro Okuno-Fujiwara & Kotaro Suzumura, 1991.
"Symmetric Cournot Oligopoly and Economic Welfare: A Synthesis,"
Discussion Paper Series
a242, Institute of Economic Research, Hitotsubashi University.
- Okuno-Fujiwara, Masahiro & Suzumura, Kotaro, 1993. "Symmetric Cournot Oligopoly and Economic Welfare: A Synthesis," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(1), pages 43-59, January.
- X. Henry Wang & Jingang Zhao, 2007.
"Why Are Firms Sometimes Unwilling to Reduce Costs?,"
0703, Department of Economics, University of Missouri.
- X. Wang & Jingang Zhao, 2010. "Why are firms sometimes unwilling to reduce costs?," Journal of Economics, Springer, vol. 101(2), pages 103-124, October.
- Vives, Xavier, 2005.
"Innovation and Competitive Pressure,"
Department of Economics, Working Paper Series
qt1s1059vr, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Vetter Henrik, 2007. "Taxes versus Permits in a Two-Stage Duopoly," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 7(1), pages 1-15, May.
- Stanford, William G., 1986. "Subgame perfect reaction function equilibria in discounted duopoly supergames are trivial," Journal of Economic Theory, Elsevier, vol. 39(1), pages 226-232, June.
- Somma, Ernesto, 1999.
"The effect of incomplete information about future technological opportunities on pre-emption,"
International Journal of Industrial Organization,
Elsevier, vol. 17(6), pages 765-799, August.
- Ernesto Somma, . "The Effect of Incomplete Information about Future Technological Opportunities on Pre-Emption," Discussion Papers 95/41, Department of Economics, University of York.
- Tseng, Mei-Chiun, 2004. "Strategic choice of flexible manufacturing technologies," International Journal of Production Economics, Elsevier, vol. 91(3), pages 223-227, October.
- Bolle, Friedel, 2008.
"Over- and under-investment according to different benchmarks,"
265, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
- Friedel Bolle, 2011. "Over- and under-investment according to different benchmarks," Journal of Economics, Springer, vol. 104(3), pages 219-238, November.
- Barbara J. Spencer & James A. Brander, 1982.
"Strategic Commitment with R&D: The Symmetric Case,"
516, Queen's University, Department of Economics.
- Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
- Partha Dasgupta & Eric Maskin, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 1-26.
- Sacco, Dario & Schmutzler, Armin, 2011. "Is there a U-shaped relation between competition and investment?," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 65-73, January.
- Athey, Susan & Schmutzler, Armin, 2001. "Investment and Market Dominance," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 1-26, Spring.
- Besley, Timothy & Suzumura, Kotaro, 1992.
"Taxation and Welfare in an Oligopoly with Strategic Commitment,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(2), pages 413-31, May.
- Besley, T. & Suzumura, K., 1989. "Taxation And Welfare In An Oligopoly With Stategic Commitment," Papers 52, Princeton, Woodrow Wilson School - Discussion Paper.
- Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February.
- Grant, S. & Quiggin, J., 1994.
"Capital Recommitment and Competition in Supply Schedules,"
280, Australian National University - Department of Economics.
- Grant, Simon & Quiggin, John, 1996. "Capital Precommitment and Competition in Supply Schedules," Journal of Industrial Economics, Wiley Blackwell, vol. 44(4), pages 427-41, December.
- Elberfeld, Walter, 2003. "A note on technology choice, firm heterogeneity and welfare," International Journal of Industrial Organization, Elsevier, vol. 21(4), pages 593-605, April.
- Vives, Xavier, 1989. "Technological competition, uncertainty, and oligopoly," Journal of Economic Theory, Elsevier, vol. 48(2), pages 386-415, August.
- Kamien, Morton I & Muller, Eitan & Zang, Israel, 1992. "Research Joint Ventures and R&D Cartels," American Economic Review, American Economic Association, vol. 82(5), pages 1293-306, December.
When requesting a correction, please mention this item's handle: RePEc:zbw:euvwdp:265. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.