Generalized Oligopoly Model Research Articles

Personalized Pricing and Competition

We study personalized pricing in a general oligopoly model. The impact of personalized pricing relative to uniform pricing hinges on the degree of market coverage. If market conditions are such that coverage is high (e.g., the production cost is low or the number of firms is high), personalized pricing harms firms and benefits consumers, whereas the opposite is true if coverage is low. When only some firms have data to personalize prices, consumers can be worse off compared to when either all or no firms personalize prices. (JEL D21, D43, D82)

Stability in a general oligopoly model

AbstractWe analyze a general but parsimonious price competition model for an oligopoly in which each firm offers any number of products. The demand volumes are general piecewise affine functions of the full price vector, generated as the “regular” extension of a base set of affine functions. The model specifies a product assortment, along with their prices and demand volumes, in contrast to most commonly used demand models. We identify a fully best response operator which is monotonically increasing so that the market converges to a Nash equilibrium, when firms dynamically adjust their prices, as best responses to their competitors' prices, at least when starting in one of two price regions. Moreover, geometrically fast convergence to a common equilibrium can be guaranteed for an arbitrary starting point, under an additional condition for the price sensitivity matrix.

State-owned enterprises, competition and product quality

We consider a general oligopoly model with consumer surplus moderated quantity competition among state-owned enterprises (SOEs), where the SOEs employ workers who are members of the state-owned worker union and produce differentiated products. We show that increasing the number of SOEs would lead to an outcome in which these enterprises choose a lower level of product quality and this, in turn, results in welfare losses for the society, depending on the degree of substitutability. Our findings are consistent with the evidence from China and uncovers important linkages that exist between worker union, product quality and competition, and that have mostly been ignored in the industrial organisation, trade and development literature.

Strategic Investment Subsidies under Asymmetric Oligopoly

AbstractThis paper examines strategic investment subsidies in an international oligopoly. A general oligopoly model is constructed in which firms compete in two stages and governments commit to investment subsidies prior to firms' actions. The paper considers asymmetry among firms that arises from the nature of goods they produce rather than their cost structures. When firms produce asymmetrically differentiated goods, it is found that a change in the number of foreign competitors may alter the sign of the optimal unilateral investment subsidy. An example of policy reversal is provided in the case of strategic research and development subsidies for a quality‐differentiated industry.

Using cost pass-through to calibrate demand

We demonstrate that cost pass-through can be used to inform demand calibration, potentially eliminating the need for data on margins, diversion, or both. We derive the relationship between cost pass-through and consumer demand using a general oligopoly model of Nash–Bertrand competition and develop specific results for four demand systems: linear demand, logit demand, log-linear demand and the Almost Ideal Demand System (AIDS). The methods we propose may be useful to researchers and antitrust authorities when reliable measures of margins or diversion are unavailable. We also develop that cost pass-through can help illuminate the suitability of some demand systems to specific economic applications.

Using Cost Pass-Through to Calibrate Demand

We demonstrate that cost pass-through can be used to inform demand calibration, potentially eliminating the need for data on margins, diversion, or both. We derive the relationship between cost pass-through and consumer demand using a general oligopoly model of Nash-Bertrand competition and develop specific results for four demand systems: linear demand, logit demand, the Almost Ideal Demand System (AIDS), and log-linear demand. The methods we propose may be useful to researchers and antitrust authorities when reliable measures of margins or diversion are unavailable.

A Generalized Oligopoly Model

This paper generalizes and unifies the traditional quantity competition oligopoly models of Cournot and Stackelberg. Traditional oligopoly models predict that, under constant marginal costs, there will only be one market share (Cournot) or a single firm with a large market share and all others with the same market share (Stackelberg). Without altering the basic assumption set, in particular the assumptions of common marginal cost functions, perfect information and linear demand, the paper presents a general model that may be useful to explain many real‐life situations of oligopoly competition, where many different market shares may coexist. Finally, it is shown that certain existing social welfare results are robust to the generalization.

Price and quantity competition among heterogeneous suppliers with two-part pricing: applications to clubs, local public goods, networks, and growth controls

Models of club goods, local public goods, and growth controls appear to have theoretical structures distinct from usual oligopoly models. This article shows, however, that they are special cases of a generalized oligopoly model that incorporates the possibility of two-part pricing and externalities between consumers (either congestion or network externalities). Our generalized two-part pricing model not only serves as a synthesis of a wide range of models but also allows us to obtain several new results on equilibrium prices. Another advantage of our model is that it can be interpreted as a reduced form of more complicated models that have spatial structures. This facilitates extension to the case where firms are heterogeneous and the number of firms is arbitrary.

Welfare losses in Canadian manufacturing under alternative oligopoly regimes

Welfare losses are computed for 167 Canadian industries using simulations of a general oligopoly model. The computations cover a wide range of oligopoly behavior and reveal the implications of different demand, marginal cost and conjectural variation elasticities. For the case of horizontal cost, losses are a maximum of 0.51 percent of GNP under Cournot equilibrium and 6.35 percent under a collusion equilibrium. In general losses increase as the absolute value of the price elasticity of demand declines and as marginal cost and conjectural variation elasticities increase.

Algorithms for oligopolistic market equilibrium problems

In this paper we consider a general oligopoly model introduced by Dafermos and Nagurney which subsumes some models treated earlier numerically and give alternative variational inequality formulations of the governing Nash equilibrium defined over Cartesian products of sets. We then exploit these formulations to construct non-linear and linearized serial decomposition schemes by firms and by firm and demand market pairs. We also introduce a new equilibration operator to solve the embedded mathematical programming problems. Our computational experience for randomly generated examples for three classes of general problems suggests strongly that the linearized Gauss-Seidel decomposition method by firms is computationally superior.

Oligopolistic and competitive behavior of spatially separated markets

We examine the connection between Cournot oligopoly and perfect competition by showing that a fairly general oligopoly model with spatially separated markets generates a general spatial price equilibrium model as an extreme, limiting case. Our analysis depends crucially on the fact that the governing equilibrium conditions of both the oligopoly and the spatial price equilibrium problem can be formulated as variational inequalities.

Demand Shifting, Optimal Firm Growth, and Rule-of-Thumb Decision Making

It is well known that firms in oligopolistic market structures prefer to compete by demand-shifting strategies like new product development, advertising, and the like, rather than trying to influence demand directly by price. The reasons that firms avoid price competition in this situation are captured neatly in the competitive response patterns of the kinked demand curve model. On the other hand, outlays for product development and advertising have the character of investment decisions in that they produce a stock of assets, often intangible, which are less vulnerable to immediate imitation by rivals. Moreover, since these outlays directly influence the real and perceived quality of a firm's products, they can serve as a powerful means for its rapid advancement forward or backward in an oligopolistic setting. Therefore, rival demand-shifting outlays will usually be a central mode of competition in such market structures. In this paper, demand-shifting behavior will be analyzed using a capital-theoretic model with oligopolistic interdependence. A model of the advertising decision under monopolistic conditions analyzed previously by M. Nerlove and K. J. Arrow has been adapted for this purpose to a duopolistic market situation.' The present inquiry will focus on equilibrium steady growth solutions and will consider in particular how a firm's growth in demand-shifting activity is affected by different factors, including various parameters relating to its rival's situation. The equilibrium steady-growth paths analyzed here will be shown to be solutions for a Cournot type model as well as for a rule-of-thumb decision-making approach commonly alluded to in the business trade literature. Most of the formal results obtained for the duopoly situation can be extended directly to the more general oligopoly model. I. THE BASIC MODEL