| Report ID: | 07-02-41751-32 |
| Initial Submission Date: | 2007-02-04 |
| Title: | Investment and Market Structure in Industries with Congestion |
| Summary: | We analyze investment incentives and market structure under oligopoly competition in service industries
with congestion effects. Firms compete by choosing prices and investments; increasing investment
reduces the congestion disutility experienced by consumers. We investigate this model through the Nash
equilibria of the pricing and investment game played by firms. We find that returns to investment and
the timing of strategic decisions are critical determinants of the outcome of the game. For a broad range
of models for which (1) firms choose prices and investments simultaneously, and (2) the model exhibits
nonincreasing returns to investment, we show that if a pure strategy Nash equilibrium exists, it is unique
and efficient; we also establish conditions for existence of pure strategy Nash equilibrium. This result
does not hold if either (1) or (2) are violated; we show that highly inefficient outcomes can be obtained
in these scenarios . In addition, we investigate several extensions, including modeling the entry of firms
into the market. Our model and results provide a framework through which a range of service industries
and network technologies can be studied, offering guidance for policy analysis. |
| Authors: | Weintraub, Gabriel Y.; Johari, Ramesh; Van Roy, Benjamin |
| Contact email: | ramesh.johari@stanford.edu |
| | Number of views : 934 Number of downloads : 444 |
