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Collusion and dynamic (under‐) investment in quality
Author(s) -
Nocke Volker
Publication year - 2007
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/j.1756-2171.2007.tb00053.x
Subject(s) - collusion , economics , investment (military) , microeconomics , quality (philosophy) , product (mathematics) , product market , sequential game , game theory , incentive , philosophy , geometry , mathematics , epistemology , politics , political science , law
In a dynamic game of investment in product quality, I investigate whether collusive underinvestment equilibria can be supported by the threat of escalation in investment outlays. When there are no spillovers, underinvestment equilibria exist even though, by deviating, a firm can gain a persistent strategic advantage. When there are strong spillovers, underinvestment equilibria fail to exist. A weakening of patent protection can thus lead to more investment in equilibrium. A “nonfragmentation” result is shown to hold: in all free‐entry equilibria, industry concentration is bounded away from zero, no matter how large the market, and despite the existence of underinvestment equilibria.