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Was Chadwick right?

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Author Info
Michel Mougeot ()
Florence Naegelen ()

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Abstract

In this paper, we evaluate the scope of Chadwick’s claim on the superiority of competition for the market over competition in the market under incomplete information. We firstly characterize the expected outcome achieved under competition in the market at a Cournot Bayesian-Nash equilibrium. Then we characterize the optimal expected outcome achieved under a competition for the market mechanism designed by a government facing a shadow cost of public funds. We show that a regulated monopoly selected by an auction mechanism results in higher expected welfare than does duopoly competition when the entry cost is low but that the opposite holds when the market size is small and the entry cost is high for some values of the shadow cost of public funds. These results are explained by the influence of adverse selection on the entry decision at the Cournot equilibrium and by the level of expected total fixed costs in both mechanisms. Copyright Springer Science+Business Media, LLC 2007

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File URL: http://hdl.handle.net/10.1007/s11151-007-9130-3
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Publisher Info
Article provided by Springer in its journal Review of Industrial Organization.

Volume (Year): 30 (2007)
Issue (Month): 2 (March)
Pages: 121-137
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:kap:revind:v:30:y:2007:i:2:p:121-137

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Web page: http://www.springerlink.com/link.asp?id=100336

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Related research
Keywords: competition for the market; regulation; Chadwick; Cournot equilibrium; adverse selection; L11; L43; D44;

References listed on IDEAS
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  1. Crew, Michael A & Kleindorfer, Paul R, 2002. "Regulatory Economics: Twenty Years of Progress?," Journal of Regulatory Economics, Springer, vol. 21(1), pages 5-22, January. [Downloadable!] (restricted)
  2. Laffont, Jean-Jacques & Tirole, Jean, 1987. "Auctioning Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 921-37, October. [Downloadable!] (restricted)
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  3. Crain, William Mark & Ekelund, Robert B, Jr, 1976. "Chadwick and Demsetz on Competition and Regulation," Journal of Law & Economics, University of Chicago Press, vol. 19(1), pages 149-62, April.
  4. Snow, Arthur & Warren, Ronald Jr., 1996. "The marginal welfare cost of public funds: Theory and estimates," Journal of Public Economics, Elsevier, vol. 61(2), pages 289-305, August. [Downloadable!] (restricted)
  5. Riordan, Michael H & Sappington, David E M, 1987. "Awarding Monopoly Franchises," American Economic Review, American Economic Association, vol. 77(3), pages 375-87, June. [Downloadable!] (restricted)
  6. Loeb, Martin & Magat, Wesley A, 1979. "A Decentralized Method for Utility Regulation," Journal of Law & Economics, University of Chicago Press, vol. 22(2), pages 399-404, October.
  7. Cramton, Peter C & Palfrey, Thomas R, 1990. "Cartel Enforcement with Uncertainty about Costs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(1), pages 17-47, February. [Downloadable!] (restricted)
    Other versions:
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