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Monopoly and Oligopoly Provision of Addictive Goods

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  • Driskill, Robert
  • McCafferty, Stephen

Abstract

This article investigates monopoly and oligopoly provision of an addictive good. Consumer preferences are modeled as in Becker and Murphy (1988). Addictive goods have characteristics that create interesting strategic issues when suppliers are noncompetitive. We characterize the perfect Markov equilibrium of a market with noncompetitive supply of an addictive good and compare it with the efficient solution. Depending on particular parameter values, we find a wide variety of possible steady-state outcomes, including ones with output above the efficient level and price below marginal cost. We also find that market power can be disadvantageous.

Suggested Citation

  • Driskill, Robert & McCafferty, Stephen, 2001. "Monopoly and Oligopoly Provision of Addictive Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 43-72, February.
    • Handle: RePEc:ier:iecrev:v:42:y:2001:i:1:p:43-72
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    Citations

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    Cited by:

    1. Luca Bossi, 2007. "Per Unit Versus As Valorem Taxes Under Dynamic Monopoly," Working Papers 0703, University of Miami, Department of Economics.
    2. Coury, Tarek & Petkov, Vladimir P., 2008. "Delegation and commitment in durable goods monopolies," Games and Economic Behavior, Elsevier, vol. 63(1), pages 41-55, May.
    3. Didier Laussel & Ngo Van Long & Joana Resende, 2021. "Asymmetric Information and Differentiated Durable Goods Monopoly: Intra-period versus intertemporal price discrimination," CIRANO Working Papers 2021s-31, CIRANO.
    4. Didier Laussel & Ngo V. Long & Joana Resende, 2020. "The curse of knowledge: having access to customer information can reduce monopoly profits," RAND Journal of Economics, RAND Corporation, vol. 51(3), pages 650-675, September.
    5. Dragone, Davide & Raggi, Davide, 2021. "Resolving the milk addiction paradox," Journal of Health Economics, Elsevier, vol. 77(C).
    6. Luca Bossi & Vladimir Petkov, 2013. "Monopoly, Time Consistency, and Dynamic Demands," Journal of Industry, Competition and Trade, Springer, vol. 13(3), pages 339-359, September.
    7. Robert Driskill & John Vrooman, 2016. "It’s Not Over ‘til the Fat Lady Sings," Journal of Sports Economics, , vol. 17(4), pages 354-376, May.
    8. Boone, Jan & Shapiro, Joel, 2006. "Selling to Consumers with Endogenous Types," CEPR Discussion Papers 5862, C.E.P.R. Discussion Papers.
    9. Akihiko Yanase, 2009. "Global environment and dynamic games of environmental policy in an international duopoly," Journal of Economics, Springer, vol. 97(2), pages 121-140, June.
    10. Vatan, Antoine, 2013. "Habit formation and strategic interactions: A new gain from trade?," Economics Letters, Elsevier, vol. 121(1), pages 101-104.
    11. Laussel, Didier & Long, Ngo Van & Resende, Joana, 2020. "Quality and price personalization under customer recognition: A dynamic monopoly model with contrasting equilibria," Journal of Economic Dynamics and Control, Elsevier, vol. 114(C).
    12. Curtis Eberwein & Ted To, 2018. "Intertemporal Non-separability and Dynamic Oligopoly," Dynamic Games and Applications, Springer, vol. 8(2), pages 232-253, June.
    13. Driskill, Robert, 2006. "Multiple equilibria in dynamic rational expectations models: A critical review," European Economic Review, Elsevier, vol. 50(1), pages 171-210, January.
    14. Timothy J. Richards & Stephen F. Hamilton & William J. Allender, 2014. "Social Networks and New Product Choice," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 96(2), pages 489-516.
    15. Luca Bossi & Vladimir Petkov, 2007. "Habits, Market Power, and Policy Selection," Working Papers 0702, University of Miami, Department of Economics.
    16. Bossi, Luca & Calcott, Paul & Petkov, Vladimir, 2013. "Optimal tax rules and addictive consumption," Journal of Economic Dynamics and Control, Elsevier, vol. 37(5), pages 984-1000.
    17. Ngo Long, 2015. "Dynamic Games Between Firms and Infinitely Lived Consumers: A Review of the Literature," Dynamic Games and Applications, Springer, vol. 5(4), pages 467-492, December.
    18. Bossi, Luca & Calcott, Paul & Petkov, Vladimir, 2011. "Optimal Tax Rules for Addictive Consumption," Working Paper Series 1673, Victoria University of Wellington, School of Economics and Finance.
    19. Bossi, Luca & Calcott, Paul & Petkov, Vladimir, 2011. "Optimal Tax Rules for Addictive Consumption," Working Paper Series 18595, Victoria University of Wellington, School of Economics and Finance.
    20. Bruce Seaman, 2004. "Competition and the Non-Profit Arts: The Lost Industrial Organization Agenda," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 28(3), pages 167-193, August.
    21. Boone, J. & Shapiro, J., 2006. "Selling to Consumers with Endogenous Types," Other publications TiSEM 204f348b-5c07-415d-95a1-3, Tilburg University, School of Economics and Management.

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