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Industry structure and the dynamics of competition.

Nocke, Volker (1999) Industry structure and the dynamics of competition. PhD thesis, London School of Economics and Political Science (United Kingdom).

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Abstract

This dissertation focuses on the analysis of industrial market structure and related topics in industrial economics. It comprises three self-contained essays on dynamic aspects of industry structure, collusion, and the limits of monopolisation. The first essay, which is contained in chapter 2, analyses a dynamic game of investment in R&D or advertising, where current investments change future market conditions. It investigates whether underinvestment can be supported in equilibrium by the threat of escalation in investment outlays. When there are no spillovers, or there is full patent protection, underinvestment equilibria are shown to exist even though, by deviating, a firm can get a persistent strategic advantage. When there are strong spillovers and weak patent protection, underinvestment equilibria fail to exist. This implies that weaker patent protection can actually lead to more investment in equilibrium. Furthermore, potential entry is introduced into the model so as to address issues of market structure. It is shown that underinvestment equilibria can be stable with respect to further entry, independently of market size and entry costs. Finally, the ''nonfragmentation" result of static stage games (Shaked and Sutton 1987) is proved to hold in this dynamic game. That is, fragmented outcomes can not be supported in any equilibrium, no matter how large the market, and despite the existence of underinvestment equilibria. The starting point of the essay in chapter 3 is the traditional view in the IO literature, according to which there is a negative relationship between cartel stability and the level of excess capacity in an industry. Recent supergame-theoretic contributions appear to show that this view is ill-founded. Focussing on the issue of enforcement of cartel rules (''incentive constraints"), however, this literature completely ignores firms' ''participation constraints". Reverting the focus of attention, the paper restores the traditional view: large cartels will not be sustainable in periods of high excess capacity (low demand). In contrast to the supergame-theoretic literature, it predicts a negative relationship between excess capacity and the collusive price. The aim of the final essay, contained in chapter 4, is to provide empirically testable predictions regarding the relationship between market size and concentration. In a model of endogenous horizontal mergers, it is shown that concentrated outcomes can not be supported in a free entry equilibrium in large exogenous sunk cost industries. In contrast, very concentrated outcomes may be sustained in endogenous sunk cost industries, no matter how large the market, and even in the absence of mergers. It is shown that these predictions do not depend on any details of the extensive form of the game, even allowing for side payments between firms and endogenous product choice. The results complement those of Sutton (1991) on the stability of fragmented outcomes.

Item Type: Thesis (PhD)
Uncontrolled Keywords: Economics, Theory, Sociology, Industrial and Labor Relations
Sets: Collections > ProQuest Etheses
URI: http://etheses.lse.ac.uk/id/eprint/2491

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