Two Firms is enough for Competition, but Three or More is better
AbstractWe present an oligopoly model where a certain fraction of consumers engage in costly non-sequential search to discover prices. There are three distinct price dispersed equilibria characterized by low, moderate and high search intensity, respectively. We show that the effects of an increase in the number of firms active in the market are sensitive(i) to the equilibrium consumers' search intensity, and(ii) to the status quo number of firms.For instance, when consumers search with low intensity, increased competition does not affect expected price, leads to greater price dispersion and welfare declines. In contrast when consumers search with high intensity, increased competition results in lower prices when the number of competitors in the market is low to begin with, but in higher prices when the number of competitors is large. Moreover, duopoly yields identical expected price and price dispersion but higher welfare than an infinite number of firms.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 01-115/1.
Date of creation: 22 Nov 2001
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Web page: http://www.tinbergen.nl
consumer search; expected price; fixed-sample-size search; oligopoly; price dispersion;
Find related papers by JEL classification:
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
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