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reducing investment, i. e. a reduction of t, would then reduce the negative external effect). We will now determine the t∗ that satisfy t∗ = t̂ as a function of β: This condition is fulfilled if equation (24) holds for some combination of t∗ and β. The derivatives of Π1 with respect to t for quantity and price competition can easily be determined after inserting 9The investment in transport cost reduction is quite similar to cost reducing R&D (see e. g. Brander and Spencer). However, strategic R&D is usually analyzed in a framework with product market competition in an

(b) efficient firms face higher integration incentives. The driving force are demand/mark-up complementarities in the product market. While this observation is new in the context of vertical-integration decisions, similar mechanisms have been exploited in other fields. For instance, Bagwell and Staiger (1994) and Athey and Schmutzler (2001) use the related idea that cost-reducing investments are strategic substitutes in the context of many oligopoly models. Complementarities between demand-enhancing and mark-up-increasing activities are crucial for this result.32

literature. Note that in our setting, the cost-reducing investments could also be interpreted as investments to increase consumers’ willingness-to-pay (i.e., product innovation). The degree of spillovers represents the proportion of the rival’s cost reduction that enters additively and costlessly into a firm’s cost reduction. Firm i ’s profit is then given by (3) π i ( q i B ,   q i S ,   x i ,   x j ) = p i B q i B + p i S q i S − C ( q i B ,   q i S ,   x i ,   x j ) ,  (3) $${\pi _i}(q_i^B,\;q_i^S,\;{x_i},\;{x_j}) = p_i^Bq_i^B + p_i^Sq_i^S - C

investments and one of the firms has an ex ante qual- ity advantage, d. This setting is similar to the main part in which each firm engages in cost-reducing investments and one has an ex ante cost disadvan- tage, d. We can show that a model with quality investments yields the same results as in the main part. A cost difference between these firms can appear in various contexts. An important example is international competition under import tariffs. An- other example is in the context of vertical foreclosure, where a vertically in- tegrated firm faces a smaller input price

under the advertising and random equilibria. The random equilibrium is a limiting case in which rms pool at zero advertising. The resulting market share allocation is incentive compatible. 21In the complete-information game considered here, all rms set the same price and in- formed consumers are indierent when using the advertising search rule. By contrast, Bag- well and Ramey (1994a) allow rms to make cost-reducing investments, and this ensures that higher-advertising rms oer strictly lower prices. In the analysis of advertising equi- libria considered here, the

, 117: 55-77. [33] Obara, I., (2001), “Private information in repeated games,” Ph. D. thesis. University of Pennsylvania. [34] Parreiras, S. (2005), “Correlated Information, mechanism design and in- formational rents,” Journal of Economic Theory, 123:210-217. [35] Persico, N., (2000), “Information acquisition in auctions,” Econometrica, 68:135-148. [36] Persico, N., (2004), “Committee design with endogenous information ”, Review of Economic Studies, 71:165—191. 25 Obara: The Full Surplus Extraction Theorem with Hidden Actions [37] Piccione, M and G. Tan, (1996), “Cost-reducing

balance of payments ad- verse. So long as the incentive to invest is high because of cost- reducing investment possibilities of the kind that Schumpeter believed occurred at the bottom of a depression, more capital is needed. With convertibility and joined capital markets, the capital is provided from abroad. The maintenance of a single capital market among the developed countries makes it impossi- ble for European countries to hold back investment. Interest rates that would rise at home because of reduced savings and a con- stant or even higher inducement to

äußerst spekulative Anlagen ratio decidendi Grundpage] einer richterlichen Entscheidung Rationalisierungseffekte rationali- zation effects —> Synergie-Effekte II Rationalisierungsinvestition [InvR] cost-reducing investment II cost- saving investment Investition mit dem Ziel der Wirtschaftlichkeitsverbesserung —> Ersatzinvestition Ratsausschuß council committee Rat[schlag] advice II fachmänni- scher Rat expert advice II Ratsstim- men votes in the Council II Rats- versammlung [VwO/D] town coun- cil II municipal council Rauchtabak [TabakStG] smoking tobacco

energy costs and agribusiness conglomeration (Weis 2007). In consequence, agribusiness migrates offshore to take advan- tage of cost-reducing investments in Southern land, water, and labour, and the prospect of untapped markets for agro-inputs provided by newly recruited out-growers (McMichael 2013). This contributes to the universalization of a model of agriculture whose technologies are com- mercially standardized rather than culturally place-based. As Sophia Murphy observes, conventional agro-industrial emphasis is on agri- cultural output, rather than

systems indicate that pressures for adjustment will be significant in two regions-the Alentejo (on the cereal and livestock pro- ducing farms using poor soils) and the Northwest (on the dominant small farms producing milk, corn, wine, and potatoes). Levels of agricultural activity can be expected to decline in these two regions unless cost- reducing investments in new (and as yet largely undiscovered) technolo- gies can improve profitability substantially. Structural adjustment in the Northwest appears likely to become a major area for policy attention. The