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

54 Pages Posted: 18 Sep 2017  

David Besanko

Northwestern University - Kellogg School of Management

Ulrich Doraszelski

Harvard University - Department of Economics; University of Pennsylvania - Business & Public Policy Department

Yaroslav Kryukov

University of Pittsburgh - University of Pittsburgh Medical Center (UPMC)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2017

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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Suggested Citation

Besanko, David and Doraszelski, Ulrich and Kryukov, Yaroslav, How Efficient is Dynamic Competition? The Case of Price as Investment (September 2017). NBER Working Paper No. w23829. Available at SSRN: https://ssrn.com/abstract=3038657

David Besanko (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-7753 (Phone)
847-467-1777 (Fax)

Ulrich Doraszelski

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-2896 (Phone)
617-495-8570 (Fax)

University of Pennsylvania - Business & Public Policy Department

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

Yaroslav Kryukov

University of Pittsburgh - University of Pittsburgh Medical Center (UPMC) ( email )

Pittsburgh, PA
United States

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