How Efficient is Dynamic Competition? The Case of Price as Investment
- American Economic Review (Forthcoming)
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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