ONE-SELLER/TWO-BUYER MARKETS WITH BUYER EXTERNALITIES AND (IM)PERFECT COMPETITION

Gerard van der Laan and Harold Houba
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Harold Houba: Department of Econometrics and Tinbergen Institute, Free University, De Boelelaan 1105, 1081 HV Amsterdam, The Netherlands

International Game Theory Review (IGTR), 2002, vol. 04, issue 02, 141-164

Abstract: In this paper the one-seller/two-buyer problem with buyer externalities is investigated under the assumption that the two buyers have legal opportunities to cooperate. It is shown that the Competitive equilibrium and the Core are robust with respect to negligible externalities and that the range of market prices in the Core belongs to range of Competitive equilibrium prices. However, these concepts yield no prediction for relatively severe externalities. Therefore, in order to provide a prediction the Bargaining set and the Multilateral Nash (MN) solution are also investigated. Surprisingly, in case of an empty Core the Bargaining set predicts a unique tuple of payoffs which are independent of the externalities and each pair of participants is equally likely. Markets with market imperfections are captured by the MN solution concept. The MN solution yields the paradox that the seller's price can be higher under imperfect competition than under perfect competition.

Keywords: Market game; externalities; Competitive equilibrium; Core; Bargaining set; Stable set; Multilateral Nash solution; Von Neumann–Morgenstern tuple; JEL classification code C71; JEL classification code C78 (search for similar items in EconPapers)
JEL-codes: B4 C0 C6 C7 D5 D7 M2 (search for similar items in EconPapers)
Date: 2002
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DOI: 10.1142/S0219198902000616

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