Oligopoly games under asymmetric costs and an application to energy production

Andrew Ledvina, Ronnie Sircar

Research output: Contribution to journalArticle

23 Scopus citations

Abstract

Oligopolies in which firms have different costs of production have been relatively under-studied. In contrast to models with symmetric costs, some firms may be inactive in equilibrium. (With symmetric costs, the results trivialize to all firms active or all firms inactive.) We concentrate on the linear demand structure with constant marginal but asymmetric costs. In static one-period models, we compare the number of active firms, i. e. the number of firms producing a positive quantity in equilibrium, across four different models of oligopoly: Cournot and Bertrand with homogeneous or differentiated goods. When firms have different costs, we show that, for fixed good type, Cournot always results in more active firms than Bertrand. Moreover, with a fixed market type, differentiated goods result in more active firms than homogeneous goods. In dynamic models, asymmetric costs induce different entry times into the market. We illustrate with a model of energy production in which multiple producers from costly but inexhaustible alternative sources such as solar or wind compete in a Cournot market against an oil producer with exhaustible supply.

Original languageEnglish (US)
Pages (from-to)261-293
Number of pages33
JournalMathematics and Financial Economics
Volume6
Issue number4
DOIs
StatePublished - May 24 2012

All Science Journal Classification (ASJC) codes

  • Statistics and Probability
  • Finance
  • Statistics, Probability and Uncertainty

Keywords

  • Bertrand model
  • Cournot model
  • Differentiated goods
  • Dynamic games
  • Exhaustible resources
  • Oligopolies

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