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Market making oligopoly

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Author Info
Simon Loertscher

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Abstract

This paper analyzes price competition between market makers who set costly capacity constraints before they intermediate between producers and consumers. The key finding is that the unique perfect equilibrium outcome is Cournot if capacity is costly and rationing efficient. This result is interesting for two main reasons: It generalizes Kreps and Scheinkman (1983) to an arbitrary number of market makers, and it contrasts with Stahl (1988) and the broader literature on market making, such as Gehrig (1993), Fingleton (1997) and Rust and Hall (2003), where due to the absence of capacity constraints on the input market the Bertrand paradox typically prevails.

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Publisher Info
Paper provided by Universitaet Bern, Departement Volkswirtschaft in its series Diskussionsschriften with number dp0512.

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Date of creation: Mar 2005
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Handle: RePEc:ube:dpvwib:dp0512

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Related research
Keywords: Market making capacity constraints price competition

Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D41 - Microeconomics - - Market Structure and Pricing - - - Perfect Competition
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. ROCHET, Jean-Charles & TIROLE, Jean, 2005. "Two-Sided Markets : A Progress Report," IDEI Working Papers 275, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
    Other versions:
    • Jean-Charles Rochet Author-Email: rochet@cict.fr Author-Workplace-Name: IDEI, University of Toulouse & Jean Tirole Author-Email: tirole@cict.fr Author-Workplace-Name: IDEI, University of Toulouse, 2006. "Two-Sided Markets: A Progress Report," RAND Journal of Economics, The RAND Corporation, vol. 37(3), pages 645-667, Autumn.
  2. Boccard, Nicolas & Wauthy, Xavier, 2004. "Bertrand competition and Cournot outcomes: a correction," Economics Letters, Elsevier, vol. 84(2), pages 163-166, August. [Downloadable!] (restricted)
  3. Sam Peltzman, 2000. "Prices Rise Faster than They Fall," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 466-502, June. [Downloadable!] (restricted)
    Other versions:
  4. Caillaud, Bernard & Jullien, Bruno, 2001. "Competing cybermediaries," European Economic Review, Elsevier, vol. 45(4-6), pages 797-808, May. [Downloadable!] (restricted)
  5. Carl Davidson & Raymond Deneckere, 1986. "Long-Run Competition in Capacity, Short-Run Competition in Price, and the Cournot Model," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 404-415, Autumn. [Downloadable!] (restricted)
  6. Fingleton, John, 1997. "Competition among Middlemen When Buyers and Sellers Can Trade Directly," Journal of Industrial Economics, Blackwell Publishing, vol. 45(4), pages 405-27, December. [Downloadable!] (restricted)
  7. Boccard, Nicolas & Wauthy, Xavier, 2000. "Bertrand competition and Cournot outcomes: further results," Economics Letters, Elsevier, vol. 68(3), pages 279-285, September. [Downloadable!] (restricted)
  8. repec:rus:hseeco:72158 is not listed on IDEAS
  9. Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Blackwell Publishing, vol. 53(1), pages 1-26, January. [Downloadable!] (restricted)
  10. Deneckere, Raymond J & Kovenock, Dan, 1992. "Price Leadership," Review of Economic Studies, Blackwell Publishing, vol. 59(1), pages 143-62, January. [Downloadable!] (restricted)
    Other versions:
    • Raymond Deneckere & Dan Kovenock, 1988. "Price Leadership," Discussion Papers 773, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  11. Glenn Ellison & Drew Fudenberg, 2003. "Knife-Edge or Plateau: When do Market Models Tip?," Levine's Bibliography 506439000000000098, UCLA Department of Economics. [Downloadable!]
    Other versions:
  12. Stahl, Dale O, II, 1988. "Bertrand Competition for Inputs and Walrasian Outcomes," American Economic Review, American Economic Association, vol. 78(1), pages 189-201, March. [Downloadable!] (restricted)
  13. Yanelle, Marie-Odile, 1989. "The strategic analysis of intermediation," European Economic Review, Elsevier, vol. 33(2-3), pages 294-301, March. [Downloadable!] (restricted)
  14. Gehrig, Thomas, 1993. "Intermediation in Search Markets," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 2(1), pages 97-120, Spring.
    Other versions:
  15. Jean-Charles Rochet & Jean Tirole, 2002. "Cooperation Among Competitors: Some Economics Of Payment Card Associations," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 549-570, Winter.
  16. Spulber, Daniel F, 1996. "Market Making by Price-Setting Firms," Review of Economic Studies, Blackwell Publishing, vol. 63(4), pages 559-80, October. [Downloadable!] (restricted)
  17. John Rust & George Hall, 2003. "Middlemen versus Market Makers: A Theory of Competitive Exchange," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 353-403, April. [Downloadable!] (restricted)
    Other versions:
  18. Dan Kovenock & Raymond J. Deneckere, 1996. "Bertrand-Edgeworth duopoly with unit cost asymmetry (*)," Economic Theory, Springer, vol. 8(1), pages 1-25.
  19. Levitan, Richard & Shubik, Martin, 1972. "Price Duopoly and Capacity Constraints," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(1), pages 111-22, February. [Downloadable!] (restricted)
    Other versions:
  20. Massimo A. De Francesco, 2003. "On a property of mixed strategy equilibria of the pricing game," Economics Bulletin, Economics Bulletin, vol. 4(30), pages 1-8. [Downloadable!]
  21. Mark Armstrong, 2005. "Competition in Two-Sided Markets," Industrial Organization 0505009, EconWPA. [Downloadable!]
    Other versions:
  22. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn. [Downloadable!] (restricted)
  23. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May. [Downloadable!] (restricted)
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