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

Dario Sacco ()
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Dario Sacco: Socioeconomic Institute, University of Zurich

No 808, SOI - Working Papers from Socioeconomic Institute - 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.

Keywords: Investment; intensity of competition; experiment (search for similar items in EconPapers)
JEL-codes: C92 L13 O31 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2008-07
New Economics Papers: this item is included in nep-bec, nep-com, nep-exp and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:soz:wpaper:0808

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