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Price and capacity competition

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  • Acemoglu, Daron
  • Bimpikis, Kostas
  • Ozdaglar, Asuman

Abstract

We study the efficiency of oligopoly equilibria in a model where firms compete over capacities and prices. Our model economy corresponds to a two-stage game. First, firms choose their capacity levels. Second, after the capacity levels are observed, they set prices. Given the capacities and prices, consumers allocate their demands across the firms. We establish the existence of pure strategy oligopoly equilibria and characterize the set of equilibria. We then investigate the efficiency properties of these equilibria, where "efficiency" is defined as the ratio of surplus in equilibrium relative to the first best. We show that efficiency in the worst oligopoly equilibria can be arbitrarily low. However, if the best oligopoly equilibrium is selected (among multiple equilibria), the worst-case efficiency loss is with N firms, and this bound is tight. We also suggest a simple way of implementing the best oligopoly equilibrium.

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Bibliographic Info

Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 66 (2009)
Issue (Month): 1 (May)
Pages: 1-26

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Handle: RePEc:eee:gamebe:v:66:y:2009:i:1:p:1-26

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Web page: http://www.elsevier.com/locate/inca/622836

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Keywords: Capacity Competition Efficiency loss Industry structure Investment oligopoly;

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References

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  1. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
  2. Martin J Osborne & Ariel Rubinstein, 2009. "A Course in Game Theory," Levine's Bibliography 814577000000000225, UCLA Department of Economics.
  3. Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 1-26, January.
  4. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
  5. Natalia Fabra & Nils-Henrik von der Fehr & David Harbord, 2002. "Designing Electricity Auctions," Microeconomics 0211017, EconWPA, revised 31 Aug 2003.
  6. Daron Acemoglu & Asuman E. Ozdaglar, 2005. "Competition and Efficiency in Congested Markets," Levine's Bibliography 172782000000000025, UCLA Department of Economics.
  7. Richard E. Levitan & Martin Shubik, 1970. "Duopoly with Price and Quantity as Strategic Variables," Cowles Foundation Discussion Papers 289, Cowles Foundation for Research in Economics, Yale University.
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Citations

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Cited by:
  1. Liu, Tian-Liang & Chen, Jian & Huang, Hai-Jun, 2011. "Existence and efficiency of oligopoly equilibrium under toll and capacity competition," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 47(6), pages 908-919.
  2. van den Berg, Vincent A.C., 2013. "Serial private infrastructures," Transportation Research Part B: Methodological, Elsevier, vol. 56(C), pages 186-202.
  3. Vincent A.C. van den Berg, 2012. "Auctions for Private Congestible Infrastructures," Tinbergen Institute Discussion Papers 12-087/VIII, Tinbergen Institute, revised 19 Oct 2012.
  4. Vincent A.C. van den Berg, 2012. "Auctions for Private Congestible Infrastructures," Tinbergen Institute Discussion Papers 12-087/VIII, Tinbergen Institute, revised 19 Oct 2012.
  5. José R. Correa & Nicolás Figueroa & Nicolás E. Stier-Moses, 2008. "Pricing with markups in industries with increasing marginal costs," Documentos de Trabajo 256, Centro de Economía Aplicada, Universidad de Chile.
  6. van den Berg, Vincent A.C. & Verhoef, Erik T., 2012. "Is the travel time of private roads too short, too long, or just right?," Transportation Research Part B: Methodological, Elsevier, vol. 46(8), pages 971-983.
  7. de Frutos, Maria-Angeles & Fabra, Natalia, 2007. "Endogenous Capacities and Price Competition: The Role of Demand Uncertainty," CEPR Discussion Papers 6096, C.E.P.R. Discussion Papers.
  8. Robert Somogyi, 2013. "Bertrand-Edgeworth competition with substantial product differentiation," IEHAS Discussion Papers 1332, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.

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