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Market making oligopoly

  • Simon Loertscher

This paper analyzes price competition between market makers who set costly capacity constraints before they intermediate between producers and consumers. The key finding is that the unique perfect equilibrium outcome is Cournot if capacity is costly and rationing efficient. This result is interesting for two main reasons: It generalizes Kreps and Scheinkman (1983) to an arbitrary number of market makers, and it contrasts with Stahl (1988) and the broader literature on market making, such as Gehrig (1993), Fingleton (1997) and Rust and Hall (2003), where due to the absence of capacity constraints on the input market the Bertrand paradox typically prevails.

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File URL: http://www.vwl.unibe.ch/papers/dp/dp0512.pdf
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Paper provided by Universitaet Bern, Departement Volkswirtschaft in its series Diskussionsschriften with number dp0512.

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Date of creation: Mar 2005
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Handle: RePEc:ube:dpvwib:dp0512
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  1. Partha Dasgupta & Eric Maskin, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 1-26.
  2. repec:ebl:ecbull:v:4:y:2003:i:30:p:1-8 is not listed on IDEAS
  3. John Rust & George Hall, 2003. "Middlemen versus Market Makers: A Theory of Competitive Exchange," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 353-403, April.
  4. BOCCARD , Nicolas & WAUTHY, Xavier, . "Bertrand competition and Cournot outcomes: futher results," CORE Discussion Papers RP 1474, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Glenn Ellison & Drew Fudenberg, 2003. "Knife-Edge or Plateau: When Do Market Models Tip?," The Quarterly Journal of Economics, Oxford University Press, vol. 118(4), pages 1249-1278.
  6. Stahl, Dale O, II, 1988. "Bertrand Competition for Inputs and Walrasian Outcomes," American Economic Review, American Economic Association, vol. 78(1), pages 189-201, March.
  7. Raymond J. Deneckere & Dan Kovenock, 1992. "Price Leadership," Review of Economic Studies, Oxford University Press, vol. 59(1), pages 143-162.
    • Raymond Deneckere & Dan Kovenock, 1988. "Price Leadership," Discussion Papers 773, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Thomas Gehrig, 1993. "Intermediation in Search Markets," Discussion Papers 1058, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. repec:rus:hseeco:72158 is not listed on IDEAS
  10. Mark Armstrong, 2005. "Competition in Two-Sided Markets," Industrial Organization 0505009, EconWPA.
  11. Richard E. Levitan & Martin Shubik, 1970. "Price Duopoly and Capacity Constraints," Cowles Foundation Discussion Papers 287, Cowles Foundation for Research in Economics, Yale University.
  12. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May.
  13. Boccard, Nicolas & Wauthy, Xavier, 2004. "Bertrand competition and Cournot outcomes: a correction," Economics Letters, Elsevier, vol. 84(2), pages 163-166, August.
  14. Yanelle, Marie-Odile, 1989. "The strategic analysis of intermediation," European Economic Review, Elsevier, vol. 33(2-3), pages 294-301, March.
  15. Caillaud, Bernard & Jullien, Bruno, 2001. "Competing cybermediaries," European Economic Review, Elsevier, vol. 45(4-6), pages 797-808, May.
  16. Fingleton, John, 1997. "Competition among Middlemen When Buyers and Sellers Can Trade Directly," Journal of Industrial Economics, Wiley Blackwell, vol. 45(4), pages 405-27, December.
  17. Daniel F. Spulber, 1996. "Market Making by Price-Setting Firms," Review of Economic Studies, Oxford University Press, vol. 63(4), pages 559-580.
  18. Sam Peltzman, 2000. "Prices Rise Faster than They Fall," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 466-502, June.
  19. Dan Kovenock & Raymond J. Deneckere, 1996. "Bertrand-Edgeworth duopoly with unit cost asymmetry (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(1), pages 1-25.
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