Price-Rising Competition: a Higher Market Price When a Monopoly Faces a Small Entrant

Shao, Jing; Chen, Huanhuan; Li, Jinke

doi:10.1007/s10842-022-00392-w

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Price-Rising Competition: a Higher Market Price When a Monopoly Faces a Small Entrant

Jing Shao

, Huanhuan Chen, Jinke Li

Journal of Industry, Competition and Trade, Volume: 22, Issue: 3, Pages: 481 - 518

Swansea University Authors: Jing Shao , Huanhuan Chen, Jinke Li

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DOI (Published version): 10.1007/s10842-022-00392-w

Abstract

The UK retail electricity market revealed (i) the co-occurrence between a declining market concentration and an increasing price and (ii) price differentiation between incumbents and small suppliers. We construct an infinite sequential game in which a monopoly faces a small entrant and find an equil...

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Published in:	Journal of Industry, Competition and Trade
ISSN:	1566-1679 1573-7012
Published:	Springer Science and Business Media LLC 2022
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URI:	https://cronfa.swan.ac.uk/Record/cronfa61588
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first_indexed	2022-10-19T10:06:33Z
last_indexed	2023-01-13T19:22:26Z
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spelling	v2 61588 2022-10-19 Price-Rising Competition: a Higher Market Price When a Monopoly Faces a Small Entrant 4957a0af8a9dd429738c64c124c3f8e8 0000-0003-0587-317X Jing Shao Jing Shao true false 1203d518c75756a9f5c4699cdeaa09b8 Huanhuan Chen Huanhuan Chen true false 1d12dcf12aad73117a2a5f43cf233aae Jinke Li Jinke Li true false 2022-10-19 ECON The UK retail electricity market revealed (i) the co-occurrence between a declining market concentration and an increasing price and (ii) price differentiation between incumbents and small suppliers. We construct an infinite sequential game in which a monopoly faces a small entrant and find an equilibrium where both players are not motivated to deviate. However, this equilibrium imposes a condition on the values of model parameters. If the condition is unmet, the interactions between the two players will be unending. Nonetheless, we suggest that two states where at least one player is not motivated to deviate could be a place to settle, but the choice depends on which player is more concerned about market stability. Besides, the two observations are found in equilibrium and two states. Finally, we argue that the finding is jointly contributed by four features: small entrant with a lower marginal cost and constrained capacity, switching costs, and barriers to entry. If any feature is relaxed, the entry of the small firm will not lead to a rising market price. Journal Article Journal of Industry, Competition and Trade 22 3 481 518 Springer Science and Business Media LLC 1566-1679 1573-7012 Market entry; Constrained capacity; Switching costs; Competition; Rising price; Equilibrium 11 11 2022 2022-11-11 10.1007/s10842-022-00392-w COLLEGE NANME Economics COLLEGE CODE ECON Swansea University SU Library paid the OA fee (TA Institutional Deal) 2023-08-30T12:11:54.2341536 2022-10-19T10:53:51.0485139 Faculty of Humanities and Social Sciences Jing Shao 0000-0003-0587-317X 1 Huanhuan Chen 2 Jinke Li 3 61588__25764__cbf0031bb2ed4208ae53af21ca420f44.pdf 61588.pdf 2022-11-14T13:37:48.5114761 Output 3533854 application/pdf Version of Record true © The Author(s) 2022. This article is licensed under a Creative Commons Attribution 4.0 International License true Eng http://creativecommons.org/licenses/by/4.0/
title	Price-Rising Competition: a Higher Market Price When a Monopoly Faces a Small Entrant
spellingShingle	Price-Rising Competition: a Higher Market Price When a Monopoly Faces a Small Entrant Jing Shao Huanhuan Chen Jinke Li
title_short	Price-Rising Competition: a Higher Market Price When a Monopoly Faces a Small Entrant
title_full	Price-Rising Competition: a Higher Market Price When a Monopoly Faces a Small Entrant
title_fullStr	Price-Rising Competition: a Higher Market Price When a Monopoly Faces a Small Entrant
title_full_unstemmed	Price-Rising Competition: a Higher Market Price When a Monopoly Faces a Small Entrant
title_sort	Price-Rising Competition: a Higher Market Price When a Monopoly Faces a Small Entrant
author_id_str_mv	4957a0af8a9dd429738c64c124c3f8e8 1203d518c75756a9f5c4699cdeaa09b8 1d12dcf12aad73117a2a5f43cf233aae
author_id_fullname_str_mv	4957a0af8a9dd429738c64c124c3f8e8_*_Jing Shao 1203d518c75756a9f5c4699cdeaa09b8__Huanhuan Chen 1d12dcf12aad73117a2a5f43cf233aae_**_Jinke Li
author	Jing Shao Huanhuan Chen Jinke Li
author2	Jing Shao Huanhuan Chen Jinke Li
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container_title	Journal of Industry, Competition and Trade
container_volume	22
container_issue	3
container_start_page	481
publishDate	2022
institution	Swansea University
issn	1566-1679 1573-7012
doi_str_mv	10.1007/s10842-022-00392-w
publisher	Springer Science and Business Media LLC
college_str	Faculty of Humanities and Social Sciences
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description	The UK retail electricity market revealed (i) the co-occurrence between a declining market concentration and an increasing price and (ii) price differentiation between incumbents and small suppliers. We construct an infinite sequential game in which a monopoly faces a small entrant and find an equilibrium where both players are not motivated to deviate. However, this equilibrium imposes a condition on the values of model parameters. If the condition is unmet, the interactions between the two players will be unending. Nonetheless, we suggest that two states where at least one player is not motivated to deviate could be a place to settle, but the choice depends on which player is more concerned about market stability. Besides, the two observations are found in equilibrium and two states. Finally, we argue that the finding is jointly contributed by four features: small entrant with a lower marginal cost and constrained capacity, switching costs, and barriers to entry. If any feature is relaxed, the entry of the small firm will not lead to a rising market price.
published_date	2022-11-11T12:11:55Z
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Price-Rising Competition: a Higher Market Price When a Monopoly Faces a Small Entrant

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