[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/ube/dpvwib/dp0512.html
   My bibliography  Save this paper

Market making oligopoly

Author

Listed:
  • Simon Loertscher
Abstract
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.

Suggested Citation

  • Simon Loertscher, 2005. "Market making oligopoly," Diskussionsschriften dp0512, Universitaet Bern, Departement Volkswirtschaft.
    • Handle: RePEc:ube:dpvwib:dp0512
    as

    Download full text from publisher

    File URL: https://repec.vwiit.ch/dp/dp0512.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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.
    2. Glenn Ellison & Drew Fudenberg, 2003. "Knife-Edge or Plateau: When Do Market Models Tip?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1249-1278.
    3. Gehrig, Thomas, 1993. "Intermediation in Search Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(1), pages 97-120, Spring.
    4. 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 361-366, May.
    5. Boccard, Nicolas & Wauthy, Xavier, 2004. "Bertrand competition and Cournot outcomes: a correction," Economics Letters, Elsevier, vol. 84(2), pages 163-166, August.
    6. Boccard, Nicolas & Wauthy, Xavier, 2000. "Bertrand competition and Cournot outcomes: further results," Economics Letters, Elsevier, vol. 68(3), pages 279-285, September.
    7. repec:rus:hseeco:72158 is not listed on IDEAS
    8. 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.
    9. Caillaud, Bernard & Jullien, Bruno, 2001. "Competing cybermediaries," European Economic Review, Elsevier, vol. 45(4-6), pages 797-808, May.
    10. Levitan, Richard & Shubik, Martin, 1972. "Price Duopoly and Capacity Constraints," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(1), pages 111-122, February.
    11. Massimo A. De Francesco, 2003. "On a property of mixed strategy equilibria of the pricing game," Economics Bulletin, AccessEcon, vol. 4(30), pages 1-8.
    12. Jean-Charles Rochet & Jean Tirole, 2002. "Cooperation Among Competitors: Some Economics Of Payment Card Associations," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 549-570, Winter.
    13. Daniel F. Spulber, 1996. "Market Making by Price-Setting Firms," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(4), pages 559-580.
    14. repec:ebl:ecbull:v:4:y:2003:i:30:p:1-8 is not listed on IDEAS
    15. Mark Armstrong, 2006. "Competition in two‐sided markets," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 668-691, September.
    16. Carl Davidson & Raymond Deneckere, 1986. "Long-Run Competition in Capacity, Short-Run Competition in Price, and the Cournot Model," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 404-415, Autumn.
    17. Sam Peltzman, 2000. "Prices Rise Faster than They Fall," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 466-502, June.
    18. Partha Dasgupta & Eric Maskin, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(1), pages 1-26.
    19. Raymond J. Deneckere & Dan Kovenock, 1992. "Price Leadership," The Review of Economic Studies, Review of Economic Studies Ltd, 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.
    20. repec:bla:jindec:v:45:y:1997:i:4:p:405-27 is not listed on IDEAS
    21. 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.
    22. Yanelle, Marie-Odile, 1989. "The strategic analysis of intermediation," European Economic Review, Elsevier, vol. 33(2-3), pages 294-301, March.
    23. John Fingleton, 1997. "Competition Among Middlemen When Buyers and Sellers Can Trade Directly," Journal of Industrial Economics, Wiley Blackwell, vol. 45(4), pages 405-427, December.
    24. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Barna Bakó & Attila Tasnádi, 2017. "The Kreps-Scheinkman Game in Mixed Duopolies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 173(4), pages 753-768, December.
    2. De Francesco, Massimo A. & Salvadori, Neri, 2008. "Bertrand-Edgeworth games under oligopoly with a complete characterization for the triopoly," MPRA Paper 10767, University Library of Munich, Germany, revised 26 Sep 2008.
    3. De Francesco, Massimo A. & Salvadori, Neri, 2016. "Bertrand-Edgeworth games under triopoly: the equilibrium strategies when the payoffs of the two smallest firms are proportional to their capacities," MPRA Paper 69999, University Library of Munich, Germany.
    4. Tasnádi, Attila & Bakó, Barna, 2014. "A Kreps-Scheinkman-állítás érvényessége lineáris keresletű vegyes duopóliumok esetén [The Kreps and Scheinkman result remains valid for mixed duopolies with linear demand]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(5), pages 533-543.
    5. James A. Brander & Barbara J. Spencer, 2015. "Endogenous Horizontal Product Differentiation under Bertrand and Cournot Competition: Revisiting the Bertrand Paradox," NBER Working Papers 20966, National Bureau of Economic Research, Inc.
    6. De Francesco, Massimo A. & Salvadori, Neri, 2015. "Bertrand-Edgeworth games under triopoly: the payoffs," MPRA Paper 64638, University Library of Munich, Germany.
    7. Simon Loertscher & Leslie Marx, 2014. "An Oligopoly Model for Analyzing and Evaluating (Re)-Assignments of Spectrum Licenses," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 45(3), pages 245-273, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Galeotti, Andrea & Moraga-González, José Luis, 2009. "Platform intermediation in a market for differentiated products," European Economic Review, Elsevier, vol. 53(4), pages 417-428, May.
    2. Simon Loertscher & Leslie Marx, 2014. "An Oligopoly Model for Analyzing and Evaluating (Re)-Assignments of Spectrum Licenses," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 45(3), pages 245-273, November.
    3. Lepore, Jason J., 2012. "Cournot outcomes under Bertrand–Edgeworth competition with demand uncertainty," Journal of Mathematical Economics, Elsevier, vol. 48(3), pages 177-186.
    4. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899.
    5. De Francesco, Massimo A. & Salvadori, Neri, 2016. "Bertrand-Edgeworth games under triopoly: the equilibrium strategies when the payoffs of the two smallest firms are proportional to their capacities," MPRA Paper 69999, University Library of Munich, Germany.
    6. De Francesco, Massimo A. & Salvadori, Neri, 2015. "Bertrand-Edgeworth games under triopoly: the payoffs," MPRA Paper 64638, University Library of Munich, Germany.
    7. Martimort, David & Pouyet, Jérôme, 2020. "Downstream mergers in vertically related markets with capacity constraints," International Journal of Industrial Organization, Elsevier, vol. 72(C).
    8. Simon Loertscher, 2007. "Horizontally Differentiated Market Makers," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(4), pages 793-825, December.
    9. Jiandong Ju & Scott C. Linn & Zhen Zhu, 2010. "Middlemen and Oligopolistic Market Makers," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(1), pages 1-23, March.
    10. Allison, Blake A. & Lepore, Jason J., 2014. "Verifying payoff security in the mixed extension of discontinuous games," Journal of Economic Theory, Elsevier, vol. 152(C), pages 291-303.
    11. Pieter Gautier & Bo Hu & Makoto Watanabe, 2023. "Marketmaking Middlemen," RAND Journal of Economics, RAND Corporation, vol. 54(1), pages 83-103, March.
    12. Massimo A. De Francesco, 2006. "Endogenous entry under Bertrand-Edgeworth and Cournot competition with capacity indivisibility," Department of Economics University of Siena 480, Department of Economics, University of Siena.
    13. Loertscher, Simon & Marx, Leslie M., 2017. "Club good intermediaries," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 430-459.
    14. García Díaz, Antón & Hernán González, Roberto & Kujal, Praveen, 2009. "List pricing and discounting in a Bertrand-Edgeworth duopoly," International Journal of Industrial Organization, Elsevier, vol. 27(6), pages 719-727, November.
    15. Raymond J. Deneckere & Dan Kovenock, 1988. "Capacity-Constrained Price Competition When Unit Costs Differ," Discussion Papers 861, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    16. Luca Lambertini, 2000. "Strategic Delegation and the Shape of Market Competition," Scottish Journal of Political Economy, Scottish Economic Society, vol. 47(5), pages 550-570, November.
    17. Marie-Laure Cabon-Dhersin & Nicolas Drouhin, 2020. "A general model of price competition with soft capacity constraints," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(1), pages 95-120, July.
    18. Polanski Arnold & Cardona Daniel, 2012. "Multilevel Mediation in Symmetric Trees," Review of Network Economics, De Gruyter, vol. 11(3), pages 1-23, September.
    19. Attila Tasnádi, 2016. "Endogenous timing of moves in Bertrand–Edgeworth triopolies," International Journal of Economic Theory, The International Society for Economic Theory, vol. 12(4), pages 317-334, December.
    20. Vettas, Nikolaos & Biglaiser, Gary, 2004. "Dynamic Price Competition with Capacity Constraints and Strategic Buyers," CEPR Discussion Papers 4315, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Market making; capacity constraints; price competition;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • 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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ube:dpvwib:dp0512. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Franz Koelliker (email available below). General contact details of provider: https://edirc.repec.org/data/vwibech.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.