Underinvestment and market structure

Volker Nocke

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper analyses a dynamic game of investment in R&D or advertising, where current investments change future market conditions. It investigates whether underinvestment can be supported in equilibrium by the threat of escalation in investment outlays. When there are no spillovers, or there is full patent protection, underinvestment equilibria are shown to exist even though, by deviating, a firm can get a persistent strategic advantage. When there are strong spillovers and weak patent protection, underinvestment equilibria fail to exist. This implies that weaker patent protection can actually lead to more investment in equilibrium. Furthermore, potential entry is introduced into the model so as to address the issues of market structure. It is shown that underinvestment equilibria can be stable with respect to further entry, independently of market size and entry costs. Finally, the 'nonfragmentation' result of static stage games is proved to hold in this dynamic game.

Keywords: Dynamic games; investment; collusion; industry structure (search for similar items in EconPapers)
JEL-codes: D43 L13 O31 (search for similar items in EconPapers)
Pages: 42 pages
Date: 1998-02
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http://eprints.lse.ac.uk/6754/ Open access version. (application/pdf)

Related works:
Working Paper: Underinvestment and Market Structure (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:6754

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