competition model with a cost-reducing stage prior to the
price game and a settlement stage following it, we show that price deregulation entails decreasing
monitoring investments and increasing claims both in the short and long run. Even equilibrium
premiums may steadily increase if the “competition effect” connected to new entries is outweighed
by a “monitoring effect” that raises marginal costs.
KEYWORDS: motor insurance, settlement, costreducinginvestments, deregulation
∗We thank Luigi Buzzacchi, Don Hester, Patrick Legros, Emma Sarno, the Editor Ching-to Albert
. The paper studies the net effect of restructuring on retail prices
and cost-reducinginvestment and discusses policy implications.
JEL classification: D43, L43.
Keywords: Access pricing; investment; double marginalization; vertical fore-
closure; product differentiation.
It is widely believed that introducing competition is the key to achieving the
full benefits of privatization in previously monopolized and regulated
network industries, such as telecommunications, electricity or railways.1
The recent wave of ‘deregulation’ in these industries – i
, advertising expenditure and a
cost-reducinginvestment. We find the conditions for complementarities among scale, advertising
and innovation strategies to arise. In a duopoly with substitute products all variables are higher
for the firm that moves from mass advertising to targeted advertising but decrease for the other.
In an oligopoly with complementary products all variables are higher for all firms when they shift
away from mass marketing. We conclude by linking our results to the empirical literature on
internalization which finds a positive relationship between
) and our article are complements. Second, he did not consider a case in which heterogeneous firms engage in R&D. Stenbacka (1991) considered the case in which the results of a cost-reducinginvestment are uncertain and the realization of the results is private information belonging to the innovating firm. He then examined whether merger anticipation leads to ex ante incentives for innovating firms to reveal their cost-reducing information. 5 Barros (1998) investigated a simple model highlighting the basic economic intuition about the relationship between initial
Review of Economic Studies 53 85 92 Routledge, R. 2010. “Bertrand Competition with Cost Uncertainty.” Economics Letters 107:356–9. 10.1016/j.econlet.2010.03.006 Routledge R 2010 Bertrand Competition with Cost Uncertainty
Economics Letters 107 356 9 Spulber, D. 1995. “Bertrand Competition When Rivals’ Costs Are Unknown.” Journal of Industrial Economics 43:1–11. 10.2307/2950422 Spulber D 1995 Bertrand Competition When Rivals’ Costs Are Unknown
Journal of Industrial Economics 43 1 11 Thomas, C. 1997. “Disincentives for Cost-ReducingInvestment
marginal e¤ectiveness of investment in cost
reduction. Therefore, the indirect e¤ect always expands the optimal scale of
rms as long as rms invest more with higher regulation. If the direct e¤ect
works in the same direction as the indirect e¤ect, higher regulation is likely to
lead to an equilibrium path with more shake-out of rms. Even if the direct
e¤ect does not expand the optimal scale of rms, if the indirect e¤ect gener-
ated by costreducinginvestment is su¢ ciently strong and, in particular, the
marginal cost of rms fall sharply with investment, larger shake
3 0 0 Μ . S T A D L E R
Für die isoelastische Nachfragefunktion
p(Q) = S 1 / e Q - " e , S,e > 0 ,
ergibt sich aus (B.3) ein Preis
Ρ = r
η - 1/ε
und für die Gewinnfunktion in (B.5)
( B . l l )
Dixit, Α. ( 1 9 8 6 ) , Comparative Statics for Oligopoly. International Economic Review 2 7 ,
Fersbtman, C., Muller, E. ( 1984) , Capital Accumulation Games of Infinite Duration. Journal of
Economic Theory 3 3 , 3 2 2 - 3 3 9 .
Flaherty, Μ. T. ( 1 9 8 0 a ) , Industry Structure and Cost-ReducingInvestment. Econometrica 4 8
6 Hence a firm’s investment xa is given by
ðga þ nÞ2
1 ¼ 0 ð11Þ
where ga :5 gi(xa, xa).
7 Implicit differentiation of (11) shows that investments
under the GPS increase in the output price. Intuitively, for any given
innovation yi a higher price induces more output [see (6)]. This makes cost-
reducinginvestments more beneficial.
Using (6) and (9), expected overall output is
qaðpÞ :¼ E qi þ qjjxa
sE yni jxa
ga þ n
The effect of spillovers on investments and output depends on the
characteristics of the
welfare implications, which differ from, for example, Cremer et al. (1991) and
others, come from the welfare-maximizing price regulation, not from a location
subgame. However, with endogenous production costs, privatization of the public
firm would improve welfare compared with a mixed duopoly because it would
mitigate the loss arising from excessive cost-reducinginvestments of the private
firm (Matsumura and Matsushima, 2004).
In price-regulated markets such as the hospital industry, firms rather compete in
quality or location than in prices (Brekke, 2004
reducinginvestment, 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