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Price-Rising Competition: a Higher Market Price When a Monopoly Faces a Small Entrant

Author

Listed:
  • Jing Shao

    (Swansea University)

  • Huanhuan Chen

    (Swansea University
    Zhengzhou College of Finance and Economics)

  • Jinke Li

    (Swansea University)

Abstract

The UK retail electricity market revealed (i) the co-occurrence between a declining market concentration and an increasing price and (ii) price differentiation between incumbents and small suppliers. We construct an infinite sequential game in which a monopoly faces a small entrant and find an equilibrium where both players are not motivated to deviate. However, this equilibrium imposes a condition on the values of model parameters. If the condition is unmet, the interactions between the two players will be unending. Nonetheless, we suggest that two states where at least one player is not motivated to deviate could be a place to settle, but the choice depends on which player is more concerned about market stability. Besides, the two observations are found in equilibrium and two states. Finally, we argue that the finding is jointly contributed by four features: small entrant with a lower marginal cost and constrained capacity, switching costs, and barriers to entry. If any feature is relaxed, the entry of the small firm will not lead to a rising market price.

Suggested Citation

  • Jing Shao & Huanhuan Chen & Jinke Li, 2022. "Price-Rising Competition: a Higher Market Price When a Monopoly Faces a Small Entrant," Journal of Industry, Competition and Trade, Springer, vol. 22(3), pages 481-518, December.
    • Handle: RePEc:kap:jincot:v:22:y:2022:i:3:d:10.1007_s10842-022-00392-w
    DOI: 10.1007/s10842-022-00392-w
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    References listed on IDEAS

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    More about this item

    Keywords

    Market entry; Constrained capacity; Switching costs; Competition; Rising price; Equilibrium;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium

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