An Exploration of a Congestion Good Market under Monopoly and Duopoly

Abstract

This paper analyzes the characteristics of prices and allocations of a congestion good under monopoly and duopoly in comparison with those of social optimum. The major findings of this paper are the following. First, it is shown that the monopolist could set the price lower than that of social optimum. The reason is that the monopolist sets its price considering only the effect of the existence of externality on the marginal consumer whereas the social planner considers in pricing its effect on all the consumers. This paper explores how things change if an additional firm exists in the market. The second result is that in the Bertrand equilibrium of the duopoly model, the optimal allocation of consumers between the two firms takes place based on their attitude towards the externality, and this can be accomplished by an appropriate pricing. However, this optimal allocation of consumers is only achievable when the externality works symmetrically. This leads to the third result: that is, this optimal allocation is no longer valid if there is an asymmetry in externality in the sense that the externality an individual consumer receives from others is not identical to that he or she gives to them.