Price-Rising Competition: a Higher Market Price When a Monopoly Faces a Small Entrant

Jing Shao, Huanhuan Chen and Jinke Li ()
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Jing Shao: Swansea University
Huanhuan Chen: Swansea University
Jinke Li: Swansea University

Journal of Industry, Competition and Trade, 2022, vol. 22, issue 3, No 7, 518 pages

Abstract: Abstract The UK retail electricity market revealed (i) the co-occurrence between a declining market concentration and an increasing price and (ii) price differentiation between incumbents and small suppliers. We construct an infinite sequential game in which a monopoly faces a small entrant and find an equilibrium where both players are not motivated to deviate. However, this equilibrium imposes a condition on the values of model parameters. If the condition is unmet, the interactions between the two players will be unending. Nonetheless, we suggest that two states where at least one player is not motivated to deviate could be a place to settle, but the choice depends on which player is more concerned about market stability. Besides, the two observations are found in equilibrium and two states. Finally, we argue that the finding is jointly contributed by four features: small entrant with a lower marginal cost and constrained capacity, switching costs, and barriers to entry. If any feature is relaxed, the entry of the small firm will not lead to a rising market price.

Keywords: Market entry; Constrained capacity; Switching costs; Competition; Rising price; Equilibrium (search for similar items in EconPapers)
JEL-codes: C62 D42 L12 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10842-022-00392-w

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