Investments in Oligopoly: Welfare Effects and Tests for Predation

Marius Schwartz

Oxford Economic Papers, 1989, vol. 41, issue 4, 698-719

Abstract: This paper analyzes, in a simple duopoly model, the welfare effects of investments that reduce marginal cost and, thus, lead the investing firm to expand output and the rival to contract or exit altogether. It shows why welfare can decrease even if price falls and even if the investment is costless. Some sufficient conditions are given for welfare to increase, conditions based on observable variables such as prices and outputs. The model is also used to examine the welfare properties of the test for predatory innovation proposed by J. A. Ordover and R. D. Willig (1981). Copyright 1989 by Royal Economic Society.

Date: 1989
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