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Monopoly and Oligopoly Provision of Addictive Goods
Author(s) -
Driskill Robert,
McCafferty Stephen
Publication year - 2001
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/1468-2354.00100
Subject(s) - monopoly , oligopoly , microeconomics , economics , marginal cost , market power , markov perfect equilibrium , industrial organization , nash equilibrium , cournot competition
This article investigates monopoly and oligopoly provision of an addictive good. Consumer preferences are modeled as in Becker and Murphy (1988). Addictive goods have characteristics that create interesting strategic issues when suppliers are noncompetitive. We characterize the perfect Markov equilibrium of a market with noncompetitive supply of an addictive good and compare it with the efficient solution. Depending on particular parameter values, we find a wide variety of possible steady‐state outcomes, including ones with output above the efficient level and price below marginal cost. We also find that market power can be disadvantageous.