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Efficient Competition with Small Numbers - with Applications to Privatisation and Mergers

Author

Listed:
  • Kala Krishna

    (Pennsylvania State University)

  • Torben Tranæs

    (Institute of Economics, University of Copenhagen)

Abstract

This paper studies competition between a small number of suppliers and a single buyer, (or an auction with a small number of bidders and a single seller) when total demand (supply) is uncertain. It is well known that when a small number of suppliers compete in supply functions the service is not provided efficiently. We show that production efficiency is obtained if suppliers compete in simple two-part bid functions. However, profits are not eliminated. Moreover, the buyers´ (sellers´) decision regarding how much to buy is not efficient. We also show that suppliers (bidders in an auction) always have an incentive to merge (form bidding rings) in this setting.

Suggested Citation

  • Kala Krishna & Torben Tranæs, 1999. "Efficient Competition with Small Numbers - with Applications to Privatisation and Mergers," CIE Discussion Papers 1999-01, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  • Handle: RePEc:kud:kuieci:1999-01
    as

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    References listed on IDEAS

    as
    1. Farrell, Joseph & Shapiro, Carl, 1990. "Horizontal Mergers: An Equilibrium Analysis," American Economic Review, American Economic Association, vol. 80(1), pages 107-126, March.
    2. Kala Krishna & Torben Tranæs, 1998. "Allocating multiple units by sealed-bid auctions," CIE Discussion Papers 1998-05, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
    3. B. Douglas Bernheim & Michael D. Whinston, 1986. "Menu Auctions, Resource Allocation, and Economic Influence," The Quarterly Journal of Economics, Oxford University Press, vol. 101(1), pages 1-31.
    4. Grant, Simon & Quiggin, John, 1997. "Strategic Trade Policy under Uncertainty: Sufficient Conditions for the Optimality of Ad Valorem, Specific and Quadratic Trade Taxes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(1), pages 187-203, February.
    5. Stephen W. Salant & Sheldon Switzer & Robert J. Reynolds, 1983. "Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 185-199.
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    9. Robson, Arthur J., 1981. "Implicit oligopolistic collusion is destroyed by uncertainty," Economics Letters, Elsevier, vol. 7(1), pages 75-80.
    10. Catherine D. Wolfram, 1998. "Strategic Bidding in a Multiunit Auction: An Empirical Analysis of Bids to Supply Electricity in England and Wales," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 703-725, Winter.
    11. 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.
    12. Turnbull, Stephen J., 1983. "Choosing duopoly solutions by consistent conjectures and by uncertainty," Economics Letters, Elsevier, vol. 13(2-3), pages 253-258.
    13. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, vol. 16(1), pages 8-37, March.
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    More about this item

    Keywords

    supply function competition; multi unit auctions; efficiency; deregulation of electricity generation; privatisation; mergers;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory

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