Tuesday, March 20, 2012
Posted by D. Daniel Sokol
Varela-Irimia and Xose-Luis (both Universitat Rovira i Virgili) analyze Multi-stage oligopoly models with nested logit demand structures: A simplifying approach.
ABSTRCT: Solving multi-stage oligopoly models by backward induction can easily become a complex task when firms are multi-product and demands are derived from a nested logit framework. This paper shows that under the assumption that within-segment rm shares are equal across segments, the analytical expression for equilibrium profits can be substantially simplfied. The size of the error arising when this condition does not hold perfectly is also computed. Through numerical examples, it is shown that the error is rather small in general. Therefore, using this assumption allows to gain analytical tractability in a class of models that has been used to approach relevant policy questions, such as for example firm entry in an industry or the relation between competition and location. The simplifying approach proposed in this paper is aimed at helping improving these type of models for reaching more accurate recommendations.