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      Cournot competition in networked markets

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      Author
      Bimpikis, K.
      Ehsani, S.
      İlkılıç, Rahmi
      Date
      2014
      Source Title
      EC '14 Proceedings of the fifteenth ACM conference on Economics and computation
      Publisher
      ACM
      Pages
      733
      Language
      English
      Type
      Conference Paper
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      Abstract
      The paper considers a model of competition among firms that produce a homogeneous good in a networked environment. A bipartite graph determines which subset of markets a firm can supply to. Firms compete a la Cournot and decide how to allocate their production output to the markets they are directly connected to. We assume that markets have inverse linear demand and firms have quadratic production costs. First, we show that the resulting Cournot game has a unique equilibrium for any given network and provide a characterization of the production quantities at equilibrium. Our results identify a close connection between the equilibrium outcome and supply paths in the underlying network structure. In particular, we show that whether two firms see their output in different markets as strategic substitutes or complements depends critically on the paths between those markets in the line graph induced by the original bipartite network. Armed with a characterization of the equilibrium supply decisions, we explore the effect of changes in the network structure on firms' profits and consumer welfare. First, we study the question of a firm entering a new market. We show that entry may not be beneficial for either the firm or the consumers as such a move affects the entire vector of production quantities. The firm might face a more aggressive competition in its original markets due to its entry to a new market. Moreover, the effect on other firms and consumers also depends on their location in the network. This is in stark contrast with standard results in Cournot oligopoly where entry implies more competition in the market and thus higher consumer welfare. Similarly, the effect of a merger between two firms on profits and overall welfare largely depends on the structure of competition in the original Cournot market. In particular, we show that insights from analyzing mergers in a single market do not carry over in a networked environment. Market concentration indices are insufficient to correctly account for the network effect of a merger and one should not restrict attention to the set of markets that the firms participating in the merger supply to. Finally, we study the operations of a cartel including the entire set of firms. We show that the cartel maximizes its profits by appropriately segmenting the markets among its members so that a firm supplies solely to the ones allocated to it, and we provide an algorithm that computes the optimal production quantities for each firm in the cartel. © 2014 Authors.
      Keywords
      Mergers and acquisitions
      Merging
      Networks (circuits)
      Profitability
      Cournot competition
      Market concentration
      Networked environments
      Optimal production quantity
      Production outputs
      Production quantity
      Underlying networks
      Competition
      Permalink
      http://hdl.handle.net/11693/27842
      Published Version (Please cite this version)
      http://dx.doi.org/10.1145/2600057.2602882
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      • Department of Economics 649
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