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Competition with Congestible Networks

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  • Pio Baake
  • Kay Mitusch

Abstract

We analyse competition between two network providers when the quality of each network depends negatively on the number of customers connected to that network. With respect to price competition we provide a sufficient condition for the existence of a unique pure strategy Nash equilibrium. Comparative statics show that as the congestion effect gets stronger quantities will decrease and prices increase, under both Bertrand and Cournot competition. In an example with endogenous capacities it turns out that capacities are strategic substitutes for both modes of ensuing competition. Welfare comparisons between Bertrand and Cournot competition are unambiguous for fixed capacities, but may turn around for endogenous capacities.

Suggested Citation

  • Pio Baake & Kay Mitusch, 2004. "Competition with Congestible Networks," Discussion Papers of DIW Berlin 402, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp402
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    References listed on IDEAS

    as
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    6. Scotchmer, Suzanne, 1985. "Profit-maximizing clubs," Journal of Public Economics, Elsevier, vol. 27(1), pages 25-45, June.
    7. Maggi, Giovanni, 1996. "Strategic Trade Policies with Endogenous Mode of Competition," American Economic Review, American Economic Association, vol. 86(1), pages 237-258, March.
    8. Leonard Cheng, 1985. "Comparing Bertrand and Cournot Equilibria: A Geometric Approach," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 146-152, Spring.
    9. repec:bla:jindec:v:48:y:2000:i:4:p:433-72 is not listed on IDEAS
    10. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
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    Citations

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    Cited by:

    1. Basso, Leonardo J. & Zhang, Anming, 2007. "Congestible facility rivalry in vertical structures," Journal of Urban Economics, Elsevier, vol. 61(2), pages 218-237, March.
    2. Melo, Emerson, 2014. "Price competition, free entry, and welfare in congested markets," Games and Economic Behavior, Elsevier, vol. 83(C), pages 53-72.
    3. Fabio M. Manenti, 2002. "Congestion, Private Peering and Capacity Investment on the Internet," Industrial Organization 0212003, University Library of Munich, Germany, revised 08 Apr 2003.
    4. Randrianarisoa, Laingo M. & Zhang, Anming, 2019. "Adaptation to climate change effects and competition between ports: Invest now or later?," Transportation Research Part B: Methodological, Elsevier, vol. 123(C), pages 279-322.
    5. Achim I. Czerny & Kay Mitusch & Andreas Tanner, 2010. "Priority Rules Versus Scarcity Premiums in Rail Markets," WHU Working Paper Series - Economics Group 10-03, WHU - Otto Beisheim School of Management.
    6. Ramesh Johari & Gabriel Y. Weintraub & Benjamin Van Roy, 2010. "Investment and Market Structure in Industries with Congestion," Operations Research, INFORMS, vol. 58(5), pages 1303-1317, October.
    7. Roberto Roson, 2003. "Incentives for the Expansion of Network Capacity in a “Peering” Free Access Settlement," Netnomics, Springer, vol. 5(2), pages 149-159, November.

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    More about this item

    Keywords

    Congestion; Networks; Bertrand and Cournot competition;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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