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

David Besanko, Ulrich Doraszelski, Yaroslav Kryukov

NBER Working Paper No. 23829
Issued in September 2017
NBER Program(s):Industrial Organization Program

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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Document Object Identifier (DOI): 10.3386/w23829

Published: David Besanko & Ulrich Doraszelski & Yaroslav Kryukov, 2019. "How Efficient Is Dynamic Competition? The Case of Price as Investment," American Economic Review, vol 109(9), pages 3339-3364.

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