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A Negative Effect of Cost‐Reducing Public Investment: The Role of Firms’ Entry
Author(s) -
Matsumura Toshihiro,
Yamagishi Atsushi
Publication year - 2019
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/1475-4932.12442
Subject(s) - oligopoly , production (economics) , investment (military) , barriers to entry , economics , microeconomics , government (linguistics) , indirect effect , production cost , estimation , industrial organization , free entry , business , public economics , market structure , mechanical engineering , linguistics , philosophy , management , cournot competition , politics , political science , law , engineering
We investigate public infrastructure investment that reduces production costs in oligopoly markets. The government decides on its public investment based on conventional cost–benefit analysis that considers the direct effect (the benefit estimated as a reduction in production costs). If the entry barriers are significant, this estimation is conservative because the positive indirect effect of the subsequent production expansion is ignored. In free‐entry markets, by contrast, the indirect effect can be negative depending on the demand and cost functions. Thus, conventional cost–benefit analysis is conservative in the presence of entry barriers, buy may be too optimistic without entry barriers.