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


Sacco, Dario (2008). Is there a U-shaped Relation between Competition and Investment? Working paper series / Socioeconomic Institute No. 808, 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.

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.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Socioeconomic Institute (former)
Dewey Decimal Classification:330 Economics
JEL Classification:C92, L13, O31
Language:English
Date:July 2008
Deposited On:29 Nov 2011 22:47
Last Modified:18 Feb 2018 11:21
Series Name:Working paper series / Socioeconomic Institute
OA Status:Green
Official URL:http://www.econ.uzh.ch/wp.html

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