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American Economic Review Vol. 109 No. 9 2019

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

David Besanko1; Ulrich Doraszelski2; Yaroslav Kryukov3

1 Kellogg School of Management, Northwestern University, Evanston, IL 60208 (email: ) · 2 Wharton School, University of Pennsylvania, Philadelphia, PA 19104 (email: ) · 3 University of Pittsburgh Medical Center, Pittsburgh, PA 15219 (email: )

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.

DOI
10.1257/aer.20180131
Volume
109
Issue
9
Pages
3339-3364
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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