October 22

3:30pm-5pm

Sage 5101

The Department of Economics is excited to welcome Dr. Gagan Ghosh, who will be presenting "Product varieties, private costs and price competition" on Wednesday, October 22 at 3:30 PM in SAGE 5101. We encourage all interested members of the RPI community to attend.

We study a model of price competition where consumers are uniformly distributed along a unit circle representing product varieties. Firms pay a fixed cost to enter the market and then produce a product variety represented by their location on the circle at a private per unit cost drawn from a common cost distribution. The demand for a firm’s good is determined by the prices firms set simultaneously. In this setting we show that under a standard regularity condition on the cost distribution there exists a unique equilibrium in which firms enter the market if and only if their costs are lower than an endogenous level and then set prices based on their own costs, the conditional (post-entry) expectation of rival firm costs and the number of firms in the market. The equilibrium threshold cost level is decreasing in the entry cost parameter as well as in the number of potential entrants. We show that under an additional restriction on the cost distribution the average price decreases with the threshold cost level. Finally, we provide closed form expressions for various welfare measures in the market that help identify the impact of private information. Interestingly, cost variance positively affects both consumer and producer surplus. While we provide sufficient conditions for positive entry restrictions to be welfare improving, we also show that for many common families of cost distributions the sufficient conditions do not hold and in fact is optimal from both consumer and producer perspective to set zero entry restrictions.