Cournot Competition in Networked Markets

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 à la 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, for example, due to a firm expanding into a new market or two firms merging, on firms’ profits and consumer surplus. 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, for example, a joint venture between competing firms, and guiding regulatory action in the context of market design and antitrust analysis.

The online appendix is available at https://doi.org/10.1287/mnsc.2018.3061.

This paper was accepted by Gad Allon, operations management.