How Efficient Is Dynamic Competition? The Case of Price as Investment
David Besanko, Ulrich Doraszelski, Yaroslav Kryukov
American Economic Review · 2019 · Volume 109 · Issue 9
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.
Keywords
Firm Behavior: Theory, Intertemporal Firm Choice: Investment, Capacity, and Financing, Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection, Search, Learning, Information and Knowledge, Communication, Belief, Unawareness, Oligopoly and Other Imperfect Markets
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