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Underinvestment and market structure

Nocke, Volker (1998) Underinvestment and market structure. EI (22). Suntory and Toyota International Centres for Economics and Related Disciplines, London, UK.

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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.

Item Type: Monograph (Discussion Paper)
Official URL:
Additional Information: © 1998 Volker Nocke
Divisions: STICERD
Subjects: H Social Sciences > HF Commerce
H Social Sciences > HD Industries. Land use. Labor
JEL classification: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets
O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O31 - Innovation and Invention: Processes and Incentives
D - Microeconomics > D4 - Market Structure and Pricing > D43 - Oligopoly and Other Forms of Market Imperfection
Date Deposited: 09 Jul 2008 08:23
Last Modified: 16 May 2024 11:22

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