Self-Reinforcing Market Dominance

36 Pages Posted: 31 Mar 2008 Last revised: 19 Nov 2014

See all articles by Daniel Halbheer

Daniel Halbheer

HEC Paris - Marketing

Ernst Fehr

University of Zurich - Department of Economics

Lorenz Goette

University of Lausanne; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Armin Schmutzler

University of Zurich - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: February 1, 2008

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 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, aggregate investment is not affected by the initial efficiency distribution. 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.

Keywords: Cost-reducing Investment, Asymmetric Oligopoly, Increasing

JEL Classification: C90, D43, L13, O31

Suggested Citation

Halbheer, Daniel and Fehr, Ernst and Goette, Lorenz F. and Schmutzler, Armin, Self-Reinforcing Market Dominance (February 1, 2008). Games and Economic Behavior, Vol. 67, No. 2, 2009, Available at SSRN: https://ssrn.com/abstract=1113817 or http://dx.doi.org/10.2139/ssrn.1113817

Daniel Halbheer (Contact Author)

HEC Paris - Marketing ( email )

Paris
France

Ernst Fehr

University of Zurich - Department of Economics ( email )

Blümlisalpstrasse 10
Zuerich, 8006
Switzerland
+41 1 634 3709 (Phone)
+41 1 634 4907 (Fax)

Lorenz F. Goette

University of Lausanne ( email )

Department of Economics
Batiment Internef
Lausanne, 1015
Switzerland
(021) 692'3496 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

HOME PAGE: http://www.iza.org

Armin Schmutzler

University of Zurich - Department of Economics ( email )

Zürich, CH-8006
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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