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Moral hazard, Bertrand competition and natural monopoly

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  • Brishti Guha

    () (Jawaharlal Nehru University)

Abstract

Abstract In the traditional model of Bertrand price competition among symmetric firms, there is no restriction on the number of firms that are active in equilibrium. A symmetric equilibrium exists with the different firms sharing the market. I show that this does not hold if we preserve the symmetry between firms but introduce moral hazard with a customer-sensitive probability of exposure; competition necessarily results in a natural monopoly with only one active firm. Sequential price announcements and early adoption are some equilibrium selection mechanisms that help to pin down the identity of the natural monopolist. The insights of the basic model are robust to many extensions.

Suggested Citation

  • Brishti Guha, 2017. "Moral hazard, Bertrand competition and natural monopoly," Journal of Economics, Springer, vol. 121(2), pages 153-171, June.
  • Handle: RePEc:kap:jeczfn:v:121:y:2017:i:2:d:10.1007_s00712-017-0527-7
    DOI: 10.1007/s00712-017-0527-7
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    References listed on IDEAS

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    1. Brishti Guha, 2017. "Moral hazard, Bertrand competition and natural monopoly," Journal of Economics, Springer, vol. 121(2), pages 153-171, June.

    More about this item

    Keywords

    Bertrand competition; Active firms; Moral hazard; Natural monopoly;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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