A model of market power and efficiency in private electronic exchanges |
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Authors: | Ravi Aron Lyle Ungar Annapurna Valluri |
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Affiliation: | 1. Department of Operations and Information Management, The Wharton School, University of Pennsylvania, 545 Jon M. Huntsman Hall, 3730 Walnut Street, Philadelphia, PA 19104-6340, United States;2. Department of Computer and Information Science, University of Pennsylvania, 566 Levine, 200 S. 33rd Street, Philadelphia, PA 19104-6389, United States |
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Abstract: | We investigate how private electronic markets (PEMs) can be used as a strategic tool by a large producer to compete against a consortium of smaller producers. We model the competition between a Large Producer and Consortium of producers in a two-tier supply chain as a game and characterize the resulting Subgame Perfect Nash Equilibrium. Our results demonstrate that as the costs of inputs to production increase, there are greater returns to ownership of a private exchange. Further, we demonstrate strong welfare enhancing effects of the PEM as the production efficiency of upstream suppliers declines. Finally, from a policy standpoint we show that when upstream suppliers are highly efficient, the creation of a private electronic exchange by the Large Producer will result in significant welfare loss. |
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Keywords: | E-commerce Private electronic market Market power Production efficiency |
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