We analyze a model of oligopolistic competition with ongoing investment. Special cases include incremental investment, patent races, learning by doing, and network externalities. We investigate circumstances under which a firm with low costs or high quality will extend its initial lead through investments. To this end, we derive a new comparative statics result for general games with strategic substitutes, which applies to our investment game. Finally, we highlight plausible countervailing effects that arise when investments of leaders are less effective than those of laggards, or in dynamic games when firms are sufficiently patient.
Using a simple but general two---stage framework, this paper identifies the circumstances under which increasing competition leads to more cost---reducing investments. The framework can, for instance, capture increasing substitutability for different types of oligopoly models or changes from Cournot to Bertrand competition. The paper identifies four transmission mechanisms by which competition affects investment. For a firm with lower initial marginal costs (higher efficiency), a positive effect of competition on investment is more likely. Positive spillovers support a negative effect of competition on investment. The relation between competition and investment is not affected in an unambiguous way by the level of pre---existing competition. Abstract: Using a simple but general two-stage framework, this paper identi…es the circumstances under which increasing competition leads to more cost-reducing investments. The framework can, for instance, capture increasing substitutability for di¤erent types of oligopoly models or changes from Cournot to Bertrand competition. The paper identi…es four transmission mechanisms by which competition a¤ects investment. For a …rm with lower initial marginal costs (higher e¢ ciency), a positive e¤ect of competition on investment is more likely. Positive spillovers support a negative e¤ect of competition on investment. The relation between competition and investment is not a¤ected in an unambiguous way by the level of pre-existing competition.
Recently, the`new economic geography' literature has developed as a theory of the emergence of large agglomerations which relies on increasing returns to scale and transportation costs. This literature builds on diverse intellectual traditions. It combines the insights of traditional regional science with those of modern trade theory and thus attempts to provide an integrative approach to interregional and international trade. The paper surveys this literature and discusses its relation to earlier approaches to similar topics.
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