Working Paper: NBER ID: w23829
Authors: David Besanko; Ulrich Doraszelski; Yaroslav Kryukov
Abstract: 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.
Keywords: Dynamic Competition; Price as Investment; Welfare Implications; Learning-by-Doing
JEL Codes: D21; D43; L13; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dynamic competition (L13) | low deadweight loss (H21) |
| learning-by-doing mechanism (J24) | low deadweight loss (H21) |
| shutting down investment role of price (G19) | increase in deadweight loss (H21) |
| pricing distortion low (D40) | low deadweight loss (H21) |
| nonpricing distortion low (D49) | low deadweight loss (H21) |
| nonpricing distortions lead to overentry and underexit (L11) | low deadweight loss (H21) |