Competition and Investment in Flexible Technologies

This paper examines the implications of market structure on investment in flexible manufacturing systems (FMS). We analyze a two-stage game, in which firms choose between a flexible and a less flexible technology in the first stage, then choose production quantities in the second stage. In equilibrium, a large proportion of FMS firms is associated with more concentrated markets. Our model predicts that a larger market and/or a more differentiated product results in a higher proportion of FMS firms being sustained. These predictions are empirically supported using cross-section industry level data from both the US and Japan.