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Competition with Congestible Networks

Discussion Papers 402, 23 S.

Pio Baake, Kay Mitusch

2004. Feb.

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Published in: Journal of Economics 91 (2007), No. 2, 151-176

Abstract

We analyse competition between two network providers when the quality of each network depends negatively on the number of customers connected to that network. With respect to price competition we provide a sufficient condition for the existence of a unique pure strategy Nash equilibrium. Comparative statics show that as the congestion effect gets stronger quantities will decrease and prices increase, under both Bertrand and Cournot competition. In an example with endogenous capacities it turns out that capacities are strategic substitutes for both modes of ensuing competition. Welfare comparisons between Bertrand and Cournot competition are unambiguous for fixed capacities, but may turn around for endogenous capacities.

Pio Baake

Research Director Regulation in the Firms and Markets Department



JEL-Classification: L13;L86
Keywords: Congestion; Networks; Bertrand and Cournot competition

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