Price and Nonprice Competition with Endogenous Market Structure

<jats:p>This paper examines the effect of the intensity of short‐run price competition and other exogenous variables that affect gross profit margins—such as the degree of product differentiation and the consumers' responsiveness to quality—on market structure and on advertising and R&amp;D expenditure. A key result is that more intense short‐run competition can lead to lower concentration in industries with high advertising or R&amp;D intensity, unlike exogenous‐sunk‐cost industries. Also, price competition has a negative effect on advertising or R&amp;D expenditure. A case study is also presented, which is consistent with the theoretical results of the paper.</jats:p>