DP3327 Revisiting Oligopolistic Reaction: Are FDI Decisions Strategic Complements?

Author(s): Keith Head, Thierry Mayer, John Ries
Publication Date: April 2002
Keyword(s): Oligopolistic reaction, spatial Cournot competition, uncertainty
JEL(s): F23, R30
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3327

Knickerbocker (1973) introduced ?oligopolistic reaction? to explain why firms follow rivals into foreign markets. We develop a model that incorporates central features of Knickerbocker's story-oligopoly, uncertainty, and risk aversion-to establish the conditions required to generate follow-the-leader behaviour. We find that rival foreign investment will make risk-neutral firms less inclined to move abroad once its rivals have done so. We show that the Knickerbocker prediction relies on risk aversion and derive an expression for the minimum amount of risk aversion needed to generate oligopolistic reaction.