Pricing, Market Power, And Friction In A Finite Market: The Role Of Capacities

Ruslan Shavshin and Marina Sandomirskaia
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Ruslan Shavshin: National Research University Higher School of Economics

HSE Working papers from National Research University Higher School of Economics

Abstract: This paper proposes a model of a finite two-sided market with a limited arbitrary number of products per seller, where buyers are involved in a directed search for the appropriate purchase. The effect of friction, discovered for the models with a single product per seller, remains, though the competition intensifies. We derive an analytical formula for the case of an equal number of products for every seller and deduce that the equilibrium price decreases with the growth of availability and drops to marginal costs when two sellers are able to serve the whole set of buyers. However, the seller’s utility is a bell-shaped function of the number of products. This produces the controversial impact of market concentration on the various equilibrium characteristics. For the general model with different capacities across sellers, we formulate equilibrium conditions on prices, and clarify how the market power of a particular seller depends on its capacity. Numerical analysis is also applied to the related problem of endogenous capacities

Keywords: finite market; directed search; market inefficiency; market concentration; friction; quantity competition. (search for similar items in EconPapers)
JEL-codes: C72 D43 D82 D83 L13 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2024
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic and nep-upt
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Published in WP BRP Series: Economics / EC, June 2024, pages 1-36

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