Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/76231
Authors: 
Halbheer, Daniel
Fehr, Ernst
Goette, Lorenz
Schmutzler, Armin
Year of Publication: 
2007
Series/Report no.: 
Working Paper, Socioeconomic Institute, University of Zurich 0711
Abstract: 
Are initial competitive advantages self-reinforcing, so that markets exhibit an endogenous tendency to be dominated by only a few firms? Although this question is of great economic importance, no systematic empirical study has yet addressed it. Therefore, we examine experimentally whether firms with an initial cost advantage are more likely to invest in marginal cost reductions than firms with higher initial costs. We find that the initial competitive advantages are indeed self-reinforcing, but subjects in the role of firms overinvest relative to the Nash equilibrium. However, the pattern of overinvestment even strengthens the tendency towards self-reinforcing cost advantages relative to the theoretical prediction. Further, as predicted by the Nash equilibrium, mean-preserving spreads of the initial cost distribution have no effects on aggregate investments. Finally, investment spillovers reduce investment, and investment is higher than the joint-profit maximizing benchmark for the case without spillovers and lower for the case with spillovers.
Subjects: 
Cost-reducing Investment
Asymmetric Oligopoly
Increasing Dominance
Experimental Study
JEL: 
C90
D43
L13
O31
Document Type: 
Working Paper

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