Investment and Market Structure in Industries with Congestion

Abstract:     
We analyze investment incentives and market structure under oligopoly competition in service industries with congestion effects. We consider situations where firms compete by simultaneously choosing prices and investments; increasing investment reduces the congestion disutility experienced by consumers. We define a notion of returns to investment, according to which congestion models inspired by delay exhibit increasing returns, while loss models exhibit nonincreasing returns. For a broad range of models with nonincreasing returns to investment, we establish that if a pure strategy Nash equilibrium exists, it is unique and symmetric. If demand is perfectly inelastic, this equilibrium is efficient. We also provide conditions for existence of pure strategy Nash equilibrium. We extend our analysis to a model in which firms must additionally decide whether to enter the industry. Our theoretical results contribute to the basic understanding of competition in service industries and yield insight into business and policy considerations.

Number of Pages in PDF File: 48

JEL Classification: C72, D60, L13, L90

working papers series