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| Type | Working Paper |
| Scope | Discipline-based scholarship |
| Title | Is there a U-shaped Relation between Competition and Investment? |
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| Institution | University of Zurich |
| Series Name | Working paper series / Socioeconomic Institute |
| Number | No. 808 |
| Date | 2008 |
| Abstract Text | 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. |
| Official URL | http://www.econ.uzh.ch/wp.html |
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