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Price competition, free entry, and welfare in congested markets

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  • Melo, Emerson

Abstract

In this paper we study the problem of price competition and free entry in congested markets. In particular, we consider a network with multiple origins and a common destination node, where each link is owned by a firm that sets prices in order to maximize profits, whereas users want to minimize the total cost they face, which is given by the congestion cost plus the prices set by firms. In this environment, we introduce the notion of Markovian Traffic Equilibrium to establish the existence and uniqueness of a pure strategy price equilibrium, without assuming that the demand functions are concave nor imposing particular functional forms for the latency functions. We derive explicit conditions to guarantee existence and uniqueness of equilibria. Given this existence and uniqueness result, we apply our framework to study entry decisions and welfare, and establish that in congested markets with free entry, the number of firms exceeds the social optimum.

Suggested Citation

  • Melo, Emerson, 2014. "Price competition, free entry, and welfare in congested markets," Games and Economic Behavior, Elsevier, vol. 83(C), pages 53-72.
    • Handle: RePEc:eee:gamebe:v:83:y:2014:i:c:p:53-72
    DOI: 10.1016/j.geb.2013.10.006
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    Cited by:

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    2. Vasco F. Alves, 2019. "Pricing and waiting time decisions in a health care market with private and public provision," Journal of Applied Economics, Taylor & Francis Journals, vol. 22(1), pages 174-195, January.

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    More about this item

    Keywords

    Price competition; Networks; Discrete choice; Dynamic programming; Welfare; Entry decisions;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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