DP5943 Endogenous Mode of Competition in General Equilibrium

Author(s): J Peter Neary, Joe Tharakan
Publication Date: November 2006
Keyword(s): Bertrand and Cournot competition, GOLE (General Oligoplistic Equilibrium), Kreps-Scheinkman, market integration
JEL(s): F10, F12, L13
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5943

This paper endogenises the extent of intra-sectoral competition in a multi-sectoral model of oligopoly in general equilibrium. Firms choose capacity followed by prices. If the benefits of capacity investment in a given sector are below a threshold level, the sector exhibits Bertrand behaviour, otherwise it exhibits Cournot behaviour. By endogenising the threshold parameter in general equilibrium, we show how exogenous shocks alter the mix of sectors between 'more' and 'less' competitive, or Bertrand and Cournot. The model also has implications for the effects of trade liberalisation and technological change on the relative wages of skilled and unskilled workers.