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Competition and Efficiency in Congested Markets

Department of Economics, Massachusetts Institute of Technology, E52-380B, 77 Massachusetts Avenue, Cambridge, Massachusetts 02139
Department of Electrical Engineering and Computer Science, Massachusetts Institute of Technology, 32-D630, 77 Massachusetts Avenue, Cambridge, Massachusetts 02139
daron{at}mit.edu, http://econ-www.mit.edu/faculty/?prof_id=acemoglu
asuman{at}mit.edu, http://web.mit.edu/asuman/www

We study the efficiency of oligopoly equilibria (OE) in congested markets. The motivating examples are the allocation of network flows in a communication network or of traffic in a transportation network. We show that increasing competition among oligopolists can reduce efficiency, measured as the difference between users’ willingness to pay and delay costs. We characterize a tight bound of 5/6 on efficiency in pure strategy equilibria when there is zero latency at zero flow and a tight bound of 22 – 2 with positive latency at zero flow. These bounds are tight even when the numbers of routes and oligopolists are arbitrarily large.

Key Words: pricing; competition; congestion externalities; Wardrop equilibrium; social optimum; oligopoly equilibrium; efficiency; price of anarchy
History: Received: February 18, 2005; revision received: August 6, 2005;

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