DP3327 Revisiting Oligopolistic Reaction: Are FDI Decisions Strategic Complements?

Author(s): Keith Head , Thierry Mayer , John Ries

Publication Date: April 2002

Keyword(s): Oligopolistic reaction , spatial Cournot competition , uncertainty

JEL(s): F23 , R30

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP3327.asp

Knickerbocker (1973) introduced ‘oligopolistic reaction’ to explain why firms follow rivals into foreign markets. We develop a model that incorporates central features of Knickerbocker's story-oligopoly, uncertainty, and risk aversion-to establish the conditions required to generate follow-the-leader behaviour. We find that rival foreign investment will make risk-neutral firms less inclined to move abroad once its rivals have done so. We show that the Knickerbocker prediction relies on risk aversion and derive an expression for the minimum amount of risk aversion needed to generate oligopolistic reaction.