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

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Abstract: Empirical industrial organization studies document frequent instances of over-competition and market volatility. This paper provides a new perspective on this phenomenon by introducing a psychological motive, the desire to win, defined as an extra utility received when an individual’s profit exceeds that of rivals. I show that under plausible conditions, no pure-strategy Nash equilibrium exists. Additionally, in a Cournot setting, when the desire to win is moderate, no pure-strategy equilibrium arises; when it is large, the Cournot outcome coincides with the Bertrand outcome, and the mixed strategy equilibrium still leads to overproduction. Then, I estimate the desire to win coefficient by structural estimation using maximum likelihood on experimental data. The results have practical implications for incentive design and policy, such as rank-based bonuses that offer a direct incentive to adjust competitive intensity and market volatility to maximize social welfare or firm productivity.

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

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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.