Demonstrates how competition can reduce efficiency in congested markets, indicating significant implications for network management.
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 2√2 − 2 with positive latency at zero flow. These bounds are tight even when the numbers of routes and oligopolists are arbitrarily large.
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Acemoğlu et al. (2007) studied this question.
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