Competition and investment in flexible technologies

This paper examines the implications of market structure on investment in flexible manufacturing systems (FMS). The authors analyze a two-stage game, in which firms whoose 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. The present model predicts that a larger market and/or a more differentiated product results in a higher proportion of MFS firms being sustained. These predictions are empirically supported using cross-section industry level data from both the U.S. and Japan.