Competition policy and market leaders

We study the potential loss in social welfare and changes in incentives to invest in R&D that result when the market leading firm is deprived of its position. We show that under plausible assumptions like free entry or repeated market interactions there is a social value of market leadership and its mechanical removal by means of competition policy is likely to be harmful for society.

Research Highlights► We study incentives to invest in R&D in a market with and without leadership. ► The first model we use is Stackelberg quantity competition with endogenous entry. ► The second one is repeated price competition where leadership emerges endogenously. ► We show that in both cases there is social value of market leadership. ► In both setups the leader generates higher consumer surplus and social welfare.