Dynamic Investment and Product Market Rivalry: The Network Q Model

Maria Cecilia Bustamante and Bruno Pellegrino

No 12548, CESifo Working Paper Series from CESifo

Abstract: We present a new dynamic model of corporate investment in imperfectly-competitive product markets, extending the neoclassical (Q) theory of capital to a multi-firm, multi-product, fully-structural model. Our model embeds a state-of-the-art hedonic demand system, endogenizes firms' markups and generalizes Tobin's Q to a matrix (or network) of product market spillovers, which captures how each firm's investment affects that of its rivals. We provide existence and uniqueness results along with exact, global analytical solutions for the Markov Perfect Equilibrium investment policies. We then take our model to the data for the universe of U.S. public companies and obtain five novel insights: 1) product market competition is a key force driving aggregate investment and capital allocation; 2) the persistence of firm's capital stocks increased over the past 25 years (i.e. capital became “stickier”); 3) monopoly rents account for a large, rising share of firms' value; 4) positive shocks to firms' cost of capital increase markups and concentration; 5) mergers consummated since 1995 have led to a modest decline in aggregate capital formation; at the firm-level the resulting increases in markups are highly heterogeneous.

Keywords: networks; investment; product market (search for similar items in EconPapers)
JEL-codes: C7 D2 E2 G3 (search for similar items in EconPapers)
Date: 2026
New Economics Papers: this item is included in nep-com
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.ifo.de/DocDL/cesifo1_wp12548.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12548

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().