Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/76133
Authors: 
Sacco, Dario
Year of Publication: 
2008
Series/Report no.: 
Working Paper, Socioeconomic Institute, University of Zurich 0808
Abstract: 
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.
Subjects: 
investment
intensity of competition
experiment
JEL: 
C92
L13
O31
Document Type: 
Working Paper

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