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Incentives to Invest in Transport Cost Reduction - Conceptual Issues and an Application to Electronic Commerce

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  • Bandulet Martin

    (Universität Augsburg)

  • Morasch Karl

    (Universität der Bundeswehr München)

Abstract

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.

Suggested Citation

  • Bandulet Martin & Morasch Karl, 2003. "Incentives to Invest in Transport Cost Reduction - Conceptual Issues and an Application to Electronic Commerce," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-22, December.
    • Handle: RePEc:bpj:bejeap:v:topics.3:y:2003:i:1:n:18
    DOI: 10.2202/1538-0653.1099
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    Cited by:

    1. Karl Morasch & Martin Bandulet, 2011. "Sharing the Market or Getting Closer for a Fight? Strategic Reaction to Reduced Trade Costs," Open Economies Review, Springer, vol. 22(4), pages 709-737, September.
    2. Masili, Gustavo, 2006. "Auction with aftermarket for budget constrained bidders," MPRA Paper 2134, University Library of Munich, Germany.
    3. Bacchiega, Emanuele & Randon, Emanuela & Zirulia, Lorenzo, 2012. "Strategic accessibility competition," Research in Economics, Elsevier, vol. 66(2), pages 195-212.

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