DP12279 How Efficient is Dynamic Competition? The Case of Price as Investment

Author(s): David Besanko, Ulrich Doraszelski, Yaroslav Kryukov
Publication Date: September 2017
Keyword(s): competition for the market, industry dynamics, Markov perfect equilibrium, Predatory Pricing, price as investment, welfare
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12279

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