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Strategic supply function competition with private information

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Author Info
Vives, Xavier () (IESE Business School)

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Abstract

A Bayesian supply function equilibrium is characterized in a market where firms have private information about their uncertain costs. It is found that with supply function competition, and in contrast to Bayesian Cournot competition, competitiveness is affected by the parameters of the information structure: supply functions are steeper with more noise in the private signals or more correlation among the costs parameters. In fact, for large values of noise or correlation supply functions are downward sloping, margins are larger than the Cournot ones, and as we approach the common value case they tend to the collusive level. Furthermore, competition in supply functions aggregates the dispersed information of firms (the equilibrium is privately revealing) while Cournot competition does not. The implication is that with the former the only source of deadweight loss is market power while with the latter we have to add private information. As the market grows large the equilibrium becomes competitive and we obtain an approximation to how many competitors are needed to have a certain degree of competitiveness.

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Publisher Info
Paper provided by IESE Business School in its series IESE Research Papers with number D/774.

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Length: 48 pages
Date of creation: 09 Nov 2008
Date of revision:
Handle: RePEc:ebg:iesewp:d-0774

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Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
Web page: http://www.iese.edu/
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Related research
Keywords: imperfect competition; adverse selection; competitiveness; rational expectations; collusion; welfare;

Other versions of this item:

Find related papers by JEL classification:
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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