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Was Chadwick right?

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  • Michel Mougeot

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  • Florence Naegelen

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Abstract

In this paper, we evaluate the scope of Chadwick’s claim on the superiority of competition for the market over competition in the market under incomplete information. We firstly characterize the expected outcome achieved under competition in the market at a Cournot Bayesian-Nash equilibrium. Then we characterize the optimal expected outcome achieved under a competition for the market mechanism designed by a government facing a shadow cost of public funds. We show that a regulated monopoly selected by an auction mechanism results in higher expected welfare than does duopoly competition when the entry cost is low but that the opposite holds when the market size is small and the entry cost is high for some values of the shadow cost of public funds. These results are explained by the influence of adverse selection on the entry decision at the Cournot equilibrium and by the level of expected total fixed costs in both mechanisms. Copyright Springer Science+Business Media, LLC 2007

Suggested Citation

  • Michel Mougeot & Florence Naegelen, 2007. "Was Chadwick right?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 30(2), pages 121-137, March.
  • Handle: RePEc:kap:revind:v:30:y:2007:i:2:p:121-137
    DOI: 10.1007/s11151-007-9130-3
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    References listed on IDEAS

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    1. Cramton, Peter C & Palfrey, Thomas R, 1990. "Cartel Enforcement with Uncertainty about Costs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(1), pages 17-47, February.
    2. Snow, Arthur & Warren, Ronald Jr., 1996. "The marginal welfare cost of public funds: Theory and estimates," Journal of Public Economics, Elsevier, vol. 61(2), pages 289-305, August.
    3. Loeb, Martin & Magat, Wesley A, 1979. "A Decentralized Method for Utility Regulation," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 399-404, October.
    4. Crew, Michael A & Kleindorfer, Paul R, 2002. "Regulatory Economics: Twenty Years of Progress?," Journal of Regulatory Economics, Springer, vol. 21(1), pages 5-22, January.
    5. Sjaak Hurkens, 2012. "Bayesian Nash Equilibrium in ''Linear'' Cournot Models with Private Information About Cost," UFAE and IAE Working Papers 924.12, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    6. Riordan, Michael H & Sappington, David E M, 1987. "Awarding Monopoly Franchises," American Economic Review, American Economic Association, vol. 77(3), pages 375-387, June.
    7. Dasgupta, Sudipto & Spulber, Daniel F., 1989. "Managing procurement auctions," Information Economics and Policy, Elsevier, vol. 4(1), pages 5-29.
    8. Crain, William Mark & Ekelund, Robert B, Jr, 1976. "Chadwick and Demsetz on Competition and Regulation," Journal of Law and Economics, University of Chicago Press, vol. 19(1), pages 149-162, April.
    9. Daniel F. Spulber, 1989. "Regulation and Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262192756, January.
    10. Laffont, Jean-Jacques & Tirole, Jean, 1987. "Auctioning Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 921-937, October.
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    Citations

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    Cited by:

    1. Michel Mougeot & Florence Naegelen, 2011. "Franchise bidding, regulation and investment costs," Review of Economic Design, Springer;Society for Economic Design, vol. 15(1), pages 37-58, March.
    2. Julie de Brux & Frederic Marty, 2014. "IPPP Risks and opportunities an economic perspective," Documents de Travail de l'OFCE 2014-11, Observatoire Francais des Conjonctures Economiques (OFCE).
    3. Nicolas Dupas & Frédéric Marty & Arnaud Voisin, 2011. "Partnership contracts, project finance and information asymmetries: from competition for the contract to competition within the contract?," Post-Print halshs-00202327, HAL.

    More about this item

    Keywords

    competition for the market; regulation; Chadwick; Cournot equilibrium; adverse selection; L11; L43; D44;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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