Self-Reinforcing Market Dominance

Daniel Halbheer (), Ernst Fehr (), Lorenz Goette () and Armin Schmutzler ()

No 711, Working Papers from University of Zurich, Socioeconomic Institute

Abstract: Are initial competitive advantages self-reinforcing, so that markets exhibit an endogenous tendency to be dominated by only a few firms? Although this question is of great economic importance, no systematic empirical study has yet addressed it. Therefore, we examine experimentally whether firms with an initial cost advantage are more likely to invest in cost reductions than firms with higher initial costs. Wefind that the initial competitive advantages are indeed self-reinforcing, but subjects in the role of firms overinvest relative to the Nash equilibrium. However, the pattern of overinvestment even strengthens the tendency towards self-reinforcing cost advantages relative to the theoretical prediction. Further, as predicted by the Nash equilibrium, aggregate investment is not affected by the initial efficiency distribution. Finally, investment spillovers reduce investment, and investment is higher than the joint-profit maximizing benchmark for the case without spillovers and lower for the case with spillovers.

Keywords: Cost-reducing Investment; Asymmetric Oligopoly; Increasing Dominance; Experimental Study (search for similar items in EconPapers)
JEL-codes: C90 D43 L13 O31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-exp and nep-mic
Date: 2007-08
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