Investment Dynamics in Markets with Endogenous Demand

Nikolaos Vettas ()

No 1994, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In several interesting markets, demand is an increasing function of past sales because of learning, network externalities or fashion. This paper examines entry into such markets. The two key elements of the model are that firms are uncertain about the demand (and learn in a Bayesian fashion) and that demand grows endogenously over time. The capacity expansion path of the competitive market is compared with the planning/monopoly solution. These paths differ not only with respect to levels (the market's investment is too low), but also with respect to their time patterns (externalities may lead to S-shaped diffusion). This framework provides some justification for industrial or trade policy arguments for subsidizing entry into new markets, especially for infant-export industries. The markets examined also exhibit path-dependence: small initial differences in demand conditions may lead either to an established market or a non-existing one.

Keywords: diffusion paths; infant industries; Network Externalities; New products; Path Dependence (search for similar items in EconPapers)
JEL-codes: D83 F13 L1 (search for similar items in EconPapers)
Date: 1998-11
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=1994 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Investment dynamics in markets with endogenous demand (2000)
Working Paper: Investment Dynamics in Markets with Endogenous Demand (1999)
Working Paper: Investment Dynamics in Markets with Endogenous Demand (1996)
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:cpr:ceprdp:1994

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=1994

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().