Oligopolistic competition for market share via voluntary excess supply

Abstract

An oligopoly model is developed in which firms produce a homogeneous good, but there is no automatic price adjustment mechanism to ensure that the market clears. Though market demand is certain, firm demand becomes random if producers oversupply the market because consumers are indifferent as to which firm's output they purchase. Firms may have the private incentive to oversupply the market, in effect competing for market share. Equilibrium with excess supply is shown to exist in models in which price is determined exogenously and in which firms choose price. In the latter case, equilibrium price is invariant to entry and cost decreases. The normative aspects of the equilibria are discussed.