Capacity and Price Competition in Markets with Congestion Effects
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We study oligopolistic competition in service markets where firms offer a service to customers. The service quality of a firm (from a customer's perspective) depends on the level of congestion and the charged price. A firm can set a price for the service offered and additionally decides on the service capacity to mitigate congestion. The total profit of a firm is derived from the gained revenue minus the capacity investment cost. Firms simultaneously set capacities and prices to maximize their profit and customers subsequently choose the services with lowest combined cost (congestion and price). For this model, Johari, Weintraub and Van Roy derived the first existence and uniqueness results of pure Nash equilibria (PNE) assuming mild conditions on congestion functions. Their existence proof relies on Kakutani's fixed-point theorem and a key assumption for the theorem to work is that demand for service is elastic, i.e., there is a smooth inverse demand function determining the volume of customers given the effective customers' costs. In this paper, we consider the case of inelastic demand. This scenario applies to realistic cases where customers are not willing to drop out of the market, e.g., if prices are regulated by reasonable price caps. We investigate existence, uniqueness and quality of PNE for models with inelastic demand and price caps. We show that for linear congestion cost functions, there exists a PNE. This result requires a completely new proof approach compared to previous approaches, since best responses may not exist and thus standard fixed-point arguments are not directly applicable. We show that the game is C-secure (see Reny, and McLennan, Monteiro and Tourky), which leads to the existence of PNE. We furthermore show that the PNE is unique and that the efficiency compared to a social optimum is unbounded in general.
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