Investment and Market Structure in Industries with Congestion

Operations Research, Vol. 58, No. 5, pp. 1303-1317, September-October 2010

15 Pages Posted: 20 Oct 2011

See all articles by Ramesh Johari

Ramesh Johari

Stanford University

Gabriel Y. Weintraub

Stanford Graduate School of Business, Stanford University; Columbia University - Columbia Business School - Decision Risk and Operations

Benjamin Van Roy

Stanford University - Management Science & Engineering

Multiple version iconThere are 2 versions of this paper

Date Written: 2010

Abstract

We analyze investment incentives and market structure under oligopoly competition in industries with congestion effects. Our results are particularly focused on models inspired by modern technology-based services, such as telecommunications and computing services. 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 characterize and establish uniqueness of pure strategy Nash equilibrium. 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.

Suggested Citation

Johari, Ramesh and Weintraub, Gabriel Y. and Van Roy, Benjamin, Investment and Market Structure in Industries with Congestion (2010). Operations Research, Vol. 58, No. 5, pp. 1303-1317, September-October 2010. Available at SSRN: https://ssrn.com/abstract=1946495

Ramesh Johari

Stanford University ( email )

473 Via Ortega
Stanford, CA 94305-9025
United States

Gabriel Y. Weintraub (Contact Author)

Stanford Graduate School of Business, Stanford University ( email )

Stanford, CA 94305
United States

Columbia University - Columbia Business School - Decision Risk and Operations ( email )

New York, NY
United States

Benjamin Van Roy

Stanford University - Management Science & Engineering ( email )

473 Via Ortega
Stanford, CA 94305-9025
United States

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