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Competition for scarce resources

  • Péter Eső
  • Volker Nocke
  • Lucy White

We model a downstream industry where firms compete to buy capacity in an upstream market which allocates capacity efficiently. Although downstream firms have symmetric production technologies, we show that industry structure is symmetric only if capacity is sufficiently scarce. Otherwise it is asymmetric, with one large, fat, capacity-hoarding firm and a fringe of smaller, lean, capacity-constrained firms. As demand varies, the industry switches between symmetric and asymmetric phases, generating predictions for firm size and costs across the business cycle. Surprisingly, increasing available capacity can cause a reduction in output and consumer surplus by resulting in such a switch. Copyright (c) 2010, RAND.

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Article provided by RAND Corporation in its journal The RAND Journal of Economics.

Volume (Year): 41 (2010)
Issue (Month): 3 ()
Pages: 524-548

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Handle: RePEc:bla:randje:v:41:y:2010:i:3:p:524-548
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