Essays on Strategic Investment

My dissertation explores the implications of strategic investment on market structure,

new firm entry and technology diffusion. In particular, I build on existing

theoretical models and empirical methods and develop new ones to identify strategic

investment and empirically measure its implications. This dissertation aims to

provide a framework of how firms strategically invest to deter entry and what is the

optimal entry policy in these markets. Although there is a significant theoretical

literature on strategic investment, there is only limited empirical work.

In the first chapter of my dissertation, I present a simple theoretical model of

technology adoption to illustrate why firms may have incentive to excessively invest

in the case of entry threat.

In the second chapter of my dissertation, I present a model of strategic entry

deterrence and study how internet service providers’ interactions affect their technology

deployment at local markets. The goal is to capture an important trade-off:

cable firms adopt a new cable system to provide higher speeds, but the adoption

has a preemptive effect on fiber firms’ entry. I collect and combine unique firm-level

data on broadband technology deployment and exogenous city-firm level franchise

agreements data for potential fiber entrants for New York State. I provide evidence

of strategic investment by cable incumbents to deter fiber entry. Counterfactual scenarios

suggest that the industry has experienced 16% excessive investment in cable

adoption and 12% underinvestment in fiber entry both of which are explained by

these deterrence strategies. In addition, subsidies to cable incumbents in small markets

reduce fiber entry rate by 50%. I also find that policies that promote statewide

entry as opposed to existing subsidy programs mitigate the effects from these deterrence

strategies and increase fiber entry rate by 30%. These results have wide

implications for technology diffusion, quality provision and optimal subsidy policy

in markets under entry threat.

In the third chapter of my dissertation, I investigate the effect of entry barriers

for municipal providers on incumbents’ strategic investment in the US broadband

industry. I use a spatial regression discontinuity design by examining incumbents

strategic behavior across the exogenous entry barriers. I collect and combine unique

firm-level data on incumbents’ investment decisions and state-level data about legal

entry barriers. I find that technology diffusion is slower and internet service quality

is lower in markets with entry barriers. In particular, I find that entry threat leads

to an increased cable investment of 10%. This article contributes to the limited

empirical literature that uses quasi-experimental methods to identify firms’ strategic

behavior and the role of entry barriers in equilibrium product quality. In addition,

it contibutes to the literature that examines the effect of competition, entry barriers

and entry threat on technology adoption as well as the role of public investment.