Competition Can Harm Consumers
University of Oxford - Department of Economics
La Trobe University - La Trobe Business School; Financial Research Network (FIRN)
Australian Economic Papers, Vol. 47, Issue 3, pp. 264-271, September 2008
Duopolists selling differentiated products can generate less consumer surplus than a monopoly selling one of the products. In a Hotelling-type model where a monopoly supplies more than half of potential consumers, but not all, entry by a rival leads to a duopoly price that is higher than the monopoly price. Consumers in aggregate will be made worse off by such entry when the effect of the price increase outweighs the benefit of extra variety. When consumers have continuous demand functions and firms use two-part tariffs, duopoly can also result in lower aggregate consumer surplus than monopoly.
Number of Pages in PDF File: 8
Date posted: August 22, 2008
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