Monopoly and Oligopoly Provision of Addictive Goods

Abstract

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.

The entry of Colombian-sourced heroin into the US market: The relationship between competition, price, and purity

“…The theory of addictive goods markets have no general predictions, in that some models predict that increased competition may raise the price while others predict it will lower the price (Driskill and McCafferty, 2001; Richards et al, 2007; Showalter, 1999). On the one hand, competitive pressure may bring prices down.…”

Strategic Separation from Suppliers of Vital Complementary Inputs: A Dynamic Markovian Approach

“…More precisely, we are insisting on a stronger property than time-consistency, namely Markov perfect equilibrium. 15 In a Markov perfect equilibrium, firm  uses a Markovian strategy  and the market has a Markovian price function, or expectation rule,  (which we will explain in more detail below) such that (i) given , the Markovian strategy  maximizes firm 's payoffs, for all possible starting (state, date) pairs (   ), and (ii) given , the Markovian price function  is consistent with rational expectations. 16 We assume that all investors (potential buyers of assets) have a common rule  is said to be rational if…”

The Time-Consistent Optimal Export Policy, Market Structure, and Time-Non-Separable Preferences

“…Following Driskill and McCafferty (2001), a quadratic instantaneous utility function that is also quasilinear with respect to the non-experience good is assumed:…”

“…Following Driskill and McCafferty (2001), the possibility of multiplant firms and rising marginal costs of production is allowed for. In particular, assume there are n identical domestic firms, each indexed by i, and n * identical foreign firms, indexed by i * .…”

“…This paper exploits this observation and uses it to understand optimal export policy analyses in an environment in which demand is derived from intertemporally dependent preferences. These type of preferences, introduced by Ryder and Heal (1973), similar to those in Pollak (1970), and with variants used by, among others, Becker and Murphy (1988) and Driskill and McCafferty (2001), specify that utility from current consumption depends on both current and past consumption. This specification leads to intertemporally-linked demand functions that parametrically describe a range of behaviors stretching from demand for durables to demand characterized by Pollak (1970) as arising from "habit formation" and characterized by Becker and Murphy as describing "addictive behavior" and "learning by doing" on the consumer's part.…”