Investment and Market Dominance

Susan Athey, Harvard University
Armin Schmutzler, University of Zurich

Abstract

This paper analyzes a model of oligopolistic competition with ongoing investment. Special cases include incremental investment, patent races, learning-by-doing, and network externalities. We investigate circumstances under which a firm with low costs or high quality will extend its initial lead through investments. To this end, we derive a new comparative statics result for general games with strategic substitutes, which yields the desired conditions for our investment game. Finally, we highlight plausible countervailing effects that arise when investments of leaders are less effective than those of laggards, or in dynamic games when firms are sufficiently patient.