Project Details
Projekt
Endogenous Market Incompleteness in Discontinuous Games
Applicant
Michael Zierhut, Ph.D.
Subject Area
Economic Theory
Term
from 2020 to 2022
Project identifier
Deutsche Forschungsgemeinschaft (DFG) - Project number 445347419
In most modern oligopoly markets, firms choose not only quantities or prices, but design their entire products and financial contracts strategically. Products are bundles of different features; financial contracts are bundles of state-contingent payments. This is a form of market incompleteness: If markets were complete, consumers could combine features and payments arbitrarily. For example, it would be possible to have a customized cell phone that includes internet access and GPS navigation but no camera or music player. However, if all firms sell these features only as a bundle, they strategically keep the market incomplete. If novel products or contracts were introduced, demand would exhibit a discontinuity. To understand endogenous market incompleteness, it is therefore necessary to analyze a discontinuous game.The theory of discontinuous games has been a very active area of research in recent years. However, most previous research concentrates on existence results. By contrast, the purpose of this project is on qualitative results for this important class of games. The objective is to understand the effect of potential market incompleteness on competition and welfare. When markets are complete, welfare is maximized when the number of firms is large, as under perfect competition. This is no longer true when markets are endogenously incomplete because too much competition destroys the incentive for offering new products or securities. In this project, the optimal degree of competition is determined from the curvature of market demand. It addresses the question of which innovation is relevant for consumers, and which is irrelevant. This provides a new angle on the optimal regulation of incomplete markets.
DFG Programme
WBP Fellowship
International Connection
Japan
