Investment and Market Structure in Industries with Congestion

48 Pages Posted: 24 Jan 2007 Last revised: 6 Sep 2011

See all articles by Gabriel Y. Weintraub

Gabriel Y. Weintraub

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

Ramesh Johari

Stanford University

Benjamin Van Roy

Stanford University - Management Science & Engineering

Multiple version iconThere are 2 versions of this paper

Date Written: December 2007

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.

JEL Classification: C72, D60, L13, L90

Suggested Citation

Weintraub, Gabriel Y. and Johari, Ramesh and Van Roy, Benjamin, Investment and Market Structure in Industries with Congestion (December 2007). Available at SSRN: https://ssrn.com/abstract=958811 or http://dx.doi.org/10.2139/ssrn.958811

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

Ramesh Johari

Stanford University ( email )

473 Via Ortega
Stanford, CA 94305-9025
United States

Benjamin Van Roy

Stanford University - Management Science & Engineering ( email )

473 Via Ortega
Stanford, CA 94305-9025
United States

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