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Competition with Congestible Networks

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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 equilibrium capacities are at first increasing and then decreasing in the strength of congestion. Furthermore, capacities are higher under Cournot competition. Welfare comparisons between Bertrand and Cournot competition are unambiguous for fixed capacities, but may turn around for endogenous capacities.

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Authors and Affiliations

  1. DIW Berlin, Königin-Luise-Str. 5, 14191, Berlin, Germany

    Pio Baake

  2. TU Berlin, Sekr. H 33, Straße des 17. Juni 135, 10623, Berlin, Germany

    Kay Mitusch

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  1. Pio Baake
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  2. Kay Mitusch
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Correspondence to Pio Baake.

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Baake, P., Mitusch, K. Competition with Congestible Networks. J Econ 91, 151–176 (2007). https://doi.org/10.1007/s00712-006-0242-2

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  • DOI: https://doi.org/10.1007/s00712-006-0242-2

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