Electronic Resource
Berkeley, Calif.
:
Berkeley Electronic Press (now: De Gruyter)
Topics in economic analysis & policy
3.2003, 1, art18
ISSN:
1538-0653
Source:
Berkeley Electronic Press Academic Journals
Topics:
Economics
Notes:
Do firms have proper incentives to invest in transport cost reduction? We discuss this question in a duopoly with a local firm and a distant competitor that may invest in a reduction of marginal transportation costs. In a two-stage game with investment in the first and duopoly competition in the second stage, we compare profit-maximizing investment with (constrained) welfare maximization by a social planer. Intuitively, a firm will overinvest if the negative impact on its competitor exceeds the gain in consumer surplus. We analyze how the relative strength of these two effects depends on market demand, firm conduct and investment costs. Applying our results to electronic commerce, we argue that for physical goods either overinvestment or the efficient decision not to invest is the most likely outcome while the specific characteristics of digital products yield either underinvestment or an efficient investment level that reduces transportation costs to zero.
Type of Medium:
Electronic Resource
URL:
http://www.bepress.com/bejeap/topics/vol3/iss1/art18
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