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UNIVERSITY OF CALIFORNIA, BERKELEY Department of Economics Berkeley, C a l i f o r n i a Working Paper 8730 INVESTMENT AND COORDINATION IN OLIGOPOLISTIC INDUSTRIES Richard J . Gilbert and Marvin Lieberman February 17, Key words: Investment, o l i g o p o l y , game theory. Abstract Investment by firms i n 24 chemical product i n d u s t r i e s i s ex- amined to determine whether firms invest preemptively to achieve persistent increases i n market share or whether there i s evidence of maintain-market-share behavior. The data i n d i c a t e that invest- ment reduces the p r o b a b i l i t y of capacity expansion by r i v a l firms, but the e f f e c t i s temporary. Large firms tend to display maintain- market-share behavior, while smaller firms tend to invest simulta- neously with r i v a l s . The role of preemptive investment i s l i m i t e d to that of permitting a f i r m to invest with a lower p r o b a b i l i t y of redundant investment by r i v a l s . Preemption does not allow a per- s i s t e n t increase i n market share, but instead acts as a means by which firms may coordinate capacity investment to help avoid epi- sodes of industry over-capacity. JEL C l a s s i f i c a t i o n :
Gilbert et al. (Thu,) studied this question.