Oligopolistic Product Withholding in Ricardian Markets

Abstract:     
We consider price setting strategic behavior in the market for quality-differentiated goods. In his classic analysis Ricardo showed that at the competition equilibrium the price of marginal unit is driven to zero. An oligopolistic market structure leads to a radically different equilibrium in almost all cases. Deliberate withholding of units often becomes part of a firm's Nash best response and whenever this occurs, a pure strategy equilibrium fails to exist. A necessary but not sufficient condition for a pure strategy equilibrium to exist is for one firm to own all the best quality units. We show that a mixed strategy equilibrium always exists. In spite of the price setting nature of the strategies, the associated payoff is always greater than the competitive payoff.

Keywords: Oligopoly games, mixed strategies, existence of equilibrium

JEL Classifications: D43, L13, L15, C72

Accepted Paper Series