Investment and Market Structure in Industries with Congestion

Ramesh Johari (), Gabriel Y. Weintraub () and Benjamin Van Roy ()
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Ramesh Johari: Department of Management Science and Engineering, Stanford University, Stanford, California 94305
Gabriel Y. Weintraub: Columbia Business School, New York, New York 10027
Benjamin Van Roy: Department of Management Science and Engineering, Department of Electrical Engineering, Stanford University, Stanford, California 94305

Operations Research, 2010, vol. 58, issue 5, 1303-1317

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, whereas 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.

Keywords: competition; game theory; services; congestion (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (16)

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