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Price competition, free entry, and welfare in congested markets

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  • Melo, Emerson
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    Abstract

    In this paper we study the problem of price competition and free entry in congested markets. In particular, we consider a network with multiple origins and a common destination node, where each link is owned by a firm that sets prices in order to maximize profits, whereas users want to minimize the total cost they face, which is given by the congestion cost plus the prices set by firms. In this environment, we introduce the notion of Markovian Traffic Equilibrium to establish the existence and uniqueness of a pure strategy price equilibrium, without assuming that the demand functions are concave nor imposing particular functional forms for the latency functions. We derive explicit conditions to guarantee existence and uniqueness of equilibria. Given this existence and uniqueness result, we apply our framework to study entry decisions and welfare, and establish that in congested markets with free entry, the number of firms exceeds the social optimum.

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    Bibliographic Info

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

    Volume (Year): 83 (2014)
    Issue (Month): C ()
    Pages: 53-72

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    Handle: RePEc:eee:gamebe:v:83:y:2014:i:c:p:53-72

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

    Related research

    Keywords: Price competition; Networks; Discrete choice; Dynamic programming; Welfare; Entry decisions;

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    References

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    1. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
    2. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, December.
    3. Fisk, Caroline, 1980. "Some developments in equilibrium traffic assignment," Transportation Research Part B: Methodological, Elsevier, vol. 14(3), pages 243-255, September.
    4. Andrew Caplin & Barry Nalebuff, 1990. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Cowles Foundation Discussion Papers 937, Cowles Foundation for Research in Economics, Yale University.
    5. De Borger Bruno & Dunkerley Fay & Proost Stef, 2006. "Strategic investment and pricing decisions in a congested transport corridor," Energy, Transport and Environment Working Papers Series ete0602, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment.
    6. Anderson, Simon P & de Palma, Andre & Nesterov, Yurii, 1995. "Oligopolistic Competition and the Optimal Provision of Products," Econometrica, Econometric Society, vol. 63(6), pages 1281-1301, November.
    7. Pio Baake & Kay Mitusch, 2004. "Competition with Congestible Networks," Discussion Papers of DIW Berlin 402, DIW Berlin, German Institute for Economic Research.
    8. Bruno De Borger & Stef Proost & Kurt Van Dender, 2003. "Congestion and tax competition in a parallel network," Energy, Transport and Environment Working Papers Series ete0309, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment.
    9. Engel Eduardo M & Fischer Ronald & Galetovic Alexander, 2004. "Toll Competition Among Congested Roads," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-21, March.
    10. Gérard P. Cachon & Patrick T. Harker, 2002. "Competition and Outsourcing with Scale Economies," Management Science, INFORMS, vol. 48(10), pages 1314-1333, October.
    11. Luski, Israel, 1976. "On Partial Equilibrium in a Queuing System with Two Servers," Review of Economic Studies, Wiley Blackwell, vol. 43(3), pages 519-25, October.
    12. Reitman, David, 1991. "Endogenous Quality Differentiation in Congested Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 39(6), pages 621-47, December.
    13. Levhari, David & Luski, Israel, 1978. "Duopoly pricing and waiting lines," European Economic Review, Elsevier, vol. 11(1), pages 17-35, February.
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