Cournot Competition in Networked Markets

Cournot Competition in Networked Markets

By
Kostas Bimpikis, Shayan Ehsani, Rahmi Ilkilic
Management Science (forthcoming).
2018

The paper considers a model of competition among firms that produce a homogeneous good in a networked environment. A bipartite graph determines which subset of markets a firm can supply to. Firms compete in Cournot and decide how to allocate their production output to the markets they are directly connected to. We provide a characterization of the production quantities at the unique equilibrium of the resulting game for any given network. Our results identify a novel connection between the equilibrium outcome and supply paths in the underlying network structure. We then proceed to study the impact of changes in the competition structure, e.g., due to a firm expanding into a new market or two firms merging, on firms’ profits and consumer welfare. The modeling framework we propose can be used in assessing whether expanding in a new market is profitable for a firm, identifying opportunities for collaboration, e.g., a merger, joint venture, or acquisition, between competing firms, and guiding regulatory action in the context of market design and antitrust analysis.