On the efficiency of price competition

On the efficiency of price competition

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Article ID: iaor201111223
Volume: 39
Issue: 6
Start Page Number: 414
End Page Number: 418
Publication Date: Nov 2011
Journal: Operations Research Letters
Authors: ,
Keywords: programming: multiple criteria
Abstract:

We study the efficiency of price competition among multi‐product firms in differentiated oligopolies. Under a general affine demand model, we show that total surplus (sum of industry profit and consumers’ surplus) under competition is at least 75% of the maximum total surplus achievable by a centralized planner. We also show, in contrast to more stylized oligopoly models, that price collusion can increase total surplus and that competition does not, in general, yield a Pareto efficient trade‐off between industry profit and consumers’ surplus. However, the maximum deviation of total surplus from Pareto optimality is less than 10%. These results have implications regarding the effectiveness of current anti‐trust regulations.

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