When Market Competition Benefits Firms

Junichiro Ishida, Toshihiro Matsumura and Noriaki Matsushima

No 08E011, OSIPP Discussion Paper from Osaka School of International Public Policy, Osaka 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.

Keywords: competition; oligopoly; R&D; heterogeneity; entry (search for similar items in EconPapers)
Pages: 29 pages
Date: 2008-09
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind, nep-mic and nep-tid
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:osp:wpaper:08e011

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