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The desirability of the supply function competition under demand uncertainty

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  • Ismail Saglam

    (N.A.)

Abstract

In this paper, we consider an oligopolistic industry with demand uncertainty and study the welfare comparison between the supply function competition and the stochastic Cournot competition. We prove that the expected consumer surplus is always higher under the supply function competition. By numerical computations we also show that the expected profits of the oligopolistic firms can be higher under the supply function competition only if the demand uncertainty is above a critical threshold. This threshold is increasing in the number of firms, while decreasing in the slope of the demand curve and the marginal cost of producing a unit output.

Suggested Citation

  • Ismail Saglam, 2018. "The desirability of the supply function competition under demand uncertainty," Economics Bulletin, AccessEcon, vol. 38(1), pages 541-549.
    • Handle: RePEc:ebl:ecbull:eb-18-00076
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2018/Volume38/EB-18-V38-I1-P51.pdf
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    References listed on IDEAS

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    1. Grossman, Sanford J, 1981. "Nash Equilibrium and the Industrial Organization of Markets with Large Fixed Costs," Econometrica, Econometric Society, vol. 49(5), pages 1149-1172, September.
    2. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-953, October.
    3. Delgado, Juan & Moreno, Diego, 2004. "Coalition-proof supply function equilibria in oligopoly," Journal of Economic Theory, Elsevier, vol. 114(2), pages 231-254, February.
    4. Juan Delgado, 2006. "Coalition-proof supply function equilibria under capacity constraints," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 29(1), pages 219-229, September.
    5. Rudkevich, Aleksandr & Duckworth, Max, 1998. "Strategic bidding in a deregulated generation market: implications for electricity prices, asset valuation and regulatory response," The Electricity Journal, Elsevier, vol. 11(1), pages 73-83.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Saglam, Ismail, 2018. "The Effects of Process R&D in an Asymmetric Duopoly under Cournot and Supply Function Competitions," MPRA Paper 86385, University Library of Munich, Germany.
    2. Ismail Saglam, 2018. "Ranking Supply Function and Cournot Equilibria in a Differentiated Product Duopoly with Demand Uncertainty," Games, MDPI, vol. 9(3), pages 1-13, August.
    3. Ismail Saglam, 2020. "Bargaining over collusion: the threat of supply function versus Cournot competition under demand uncertainty and cost asymmetry," The Japanese Economic Review, Springer, vol. 71(4), pages 671-693, October.

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    More about this item

    Keywords

    Supply function competition; Cournot competition; oligopoly; uncertainty;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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