Monday, October 30, 2017

How Efficient is Dynamic Competition? The Case of Price as Investment

David Besanko, Northwestern University - Kellogg School of Management, Ulrich Doraszelski, Harvard University - Department of Economics; University of Pennsylvania - Business & Public Policy Department, and Yaroslav Kryukov, University of Pittsburgh - University of Pittsburgh Medical Center (UPMC) ask How Efficient is Dynamic Competition? The Case of Price as Investment.

ABSTRACT: We study industries where the price that a firm sets serves as an investment into lower cost or higher demand. We assess the welfare implications of the ensuing competition for the market using analytical and numerical approaches to compare the equilibria of a learning-by-doing model to the first-best planner solution. We show that dynamic competition leads to low deadweight loss. This cannot be attributed to similarity between the equilibria and the planner solution. Instead, we show how learning-by-doing causes the various contributions to deadweight loss to either be small or partly offset each other.

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