Working Paper: CEPR ID: DP3327
Authors: Keith Head; Thierry Mayer; John Ries
Abstract: 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.
Keywords: Oligopolistic reaction; Spatial Cournot competition; Uncertainty
JEL Codes: F23; R30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rival foreign investment (F23) | willingness of risk-neutral firms to invest abroad (F23) |
| risk aversion (D81) | likelihood of establishing manufacturing facility abroad (F23) |
| uncertainty about costs (D89) | likelihood of establishing manufacturing facility abroad (F23) |
| rival foreign investment (F23) | FDI decisions of risk-averse firms (F23) |