Excessive Competition and Market Volatility: A Theory of the Desire to Win

📄Click here to download my paper

Abstract: Numerous studies have shown that utility functions are influenced by others’ payoffs, with fairness, envy, and guilt emerging as prominent psychological drivers. However, most of this literature focuses on continuous changes in utility. It is plausible that individuals may also experience discontinuous shifts in utility in response to social comparisons. This paper investigates one such discontinuous shift, the “desire to win”, which is defined as the utility increase experienced when one’s payoff exceeds that of others. I show that under this utility specification, if firms’ desire-to-win parameters are large, Cournot competition can effectively transform into Bertrand competition; when these parameters are small, no pure-strategy Nash equilibrium exists, and production will oscillate. I also present experimental evidence from prior studies demonstrating a statistically significant desire to win. Incorporating this utility into models of competition suggests it may lead to excessive rivalry and unstable market outcomes, thereby reducing social welfare.

Threshold Effect of R\&D Investment during Shock - Evidence from COVID-19

📄Click here to download my paper

Abstract: This paper investigates the patterns in research & development (R&D) investment decisions among firms under a systematic shock. Through the application of an R&D competition model, this study examines which firms are more inclined to invest in R&D during the pandemic. The results reveal the existence of a threshold for firms entering the R&D competition and shed light on how R&D investment varies based on firm size. I utilized the Chinese pharmaceutical industry during the COVID‑19 pandemic to conduct empirical research. I demonstrate that the increase in R&D investment ratio of large firms is greater than that of small‑ to medium‑sized firms. Furthermore, by employing a panel threshold model using firm size as the threshold variable, I also show that there is a threshold in R&D spending increase. By analyzing the R&D investment decisions of firms within the Chinese pharmaceutical industry during the COVID‑19 crisis, this study contributes to understanding how firms’ responses to systematic shocks depend on firm size and provides fresh empirical evidence.