The Red Queen in action: The longitudinal effects of capital investments in the mobile telecommunications sector

Organizations undertake capital investments in technology to generate revenues or decrease costs, and thereby enhance profitability. However, Red Queen-type responses by competing organizations in the form of rapid imitation and escalating of technology investments erode the ability of the investing organizations to sustain gains in profitability. Productivity gains from these investments may persist, but they may not translate into sustained profitability gains owing to declining prices brought about by a hypercompetitive environment. The emergence and erosion of benefits attributable to capital investments is examined by decomposing profitability into productivity, price recovery, product mix, and capacity utilization, and by regressing each performance measure on past technology investments. A polynomial distributed lag model is estimated with quarterly data for 30 firms in the mobile telecommunications services sector from 1996 to 2005. The results indicate that capital investments are positively associated with productivity of current and future periods, and their association with profitability is only positive in the future (after six quarters). These results highlight a unique outcome of the Red Queen hypothesis: simply by imitating, learning, and investing in technology due to competition is beneficial to all firms in the industry.