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Essays in oligopoly theory

University of British Columbia

This thesis comprises three essays that analyze some strategic interactions of firms in an oligopolistic setting. The first essay examines the strategic role of partial commitments. Allowing firms to deviate from their announcements at some cost relaxes the usual assumption of irrevocable commitments. Such flexible commitments are shown to increase competition and welfare when the firms' actions are strategic substitutes (quantities), but to facilitate collusion and decrease welfare when they are strategic complements (prices). Assuming flexibility to be purely of a technological nature, the model is extended to allow firms to choose between two technologies characterized by different marginal costs of production and flexibilities. With strategic substitutes, adoption of an inflexible and cost-inefficient technology can lead to increased competition and welfare. The second essay investigates the role of capacities in sustaining collusion in a repeated game. It is shown that collusion can be supported by choosing insufficient capacities if ex ante identical firms tacitly agree to produce the same output regardless of their ex post capacities. This type of self-enforcing agreement removes the rent-seeking consequences of the usual type of tacit agreements used in the literature. An exogenous increase in the discount factor is shown to possibly increase welfare by improving the cost-efficiency of firms. An exogenous increase in the number of firms may lead to an increase in the cost-inefficiency of firms and, therefore, it may decrease welfare. The last essay examines the effect of entry in one regional market on the structure and competition in another regional market that interacts with the first one through a firm (a national firm) that operates in both markets. If entry changes the national firm's profitability of undertaking activities that reduce its marginal cost, possible entry in one regional market will impinge on the profitability of the firm in the other regional market. It is shown that entry in one market can either intensify or reduce competition in the other regional market. One surprising result is that an attempt by government to subsidize entry in one market may motivate the national firm to deter entry in both markets, but this does not necessarily reduce welfare.

Thesis/Dissertation

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2009-11-13

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http://hdl.handle.net/2429/14919

Economics

University of British Columbia

UBCV

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