Monday, June 10, 2013
Posted by D. Daniel Sokol
Joao Correia-da-Silva (CEF.UP and Universidade do Porto) describes the Impossibility of market division with two-sided private information about production costs.
ABSTRACT: In a market with several independent cities, two firms with private information about their production costs decide whether to open a store in each city or restrict their activity to some cities. In cities where a single rm opens a store, this firm is a monopolist. In cities where both firms open stores, there is price competition with full revelation of private information. In equilibrium, both firms open stores in all the cities. Tacit collusion to divide the market is impeded because, by restraining from opening additional stores, a firm reveals its inefficiency, which triggers an attack from its rival.