4 ms·

I'm not sure I buy this because even if a third competitor entered and claimed nearly half of the market, the people far out in the tail of that claimed half wo

by p4wnc6 11y ago

I'm not sure I buy this because even if a third competitor entered and claimed nearly half of the market, the people far out in the tail of that claimed half would not experience any improvement in service. To them, they would be nearly just as bad off. Their relative position wouldn't improve unless many, many entrants just kept repeating the exact same formula, which is highly speculative because the market could become saturated long before a chain of entrants is built up to such a degree as to effect the people in the tails in any meaningful way It's also worth mentioning that in most real life scenarios, the risk of a cabal is incredibly high. Without regulation, what stops the first two market participants from using wealth created during their duopoly phase to "buy out" the third entrant, and then all three buy out the fourth, and so on? Each new entrant would have to value the discounted future stream of returns from their market share at something higher than the buyout, which again is really speculative. I understand that regulations present their own problems: what stops the duopoly from purchasing regulatory capture and raising barriers to entry? I'm just saying I don't think for a second that any quick and simple "but low barriers to market entry would solve this" thinking is even slightly convincing here. The Hotelling problem does really present a significant problem to natural equilibria that free markets arrive at, at least from a social welfare optimization point of view. It doesn't mean any given proposed regulation is the "right" answer, but it also doesn't do anything to build assurance that less regulation is acceptable either.

cperciva 11y ago
I'm not sure I buy this because even if a third competitor entered and claimed nearly half of the market, the people far out in the tail of that claimed half would not experience any improvement in service. To them, they would be nearly just as bad off. You're missing my point. A rational duopoly which is concerned about the possibility of a third competitor entering the market will avoid satisfying Hotelling's law. It isn't the third competitor entering the market which improves things; it's the threat of a third competitor entering the market. I understand that regulations present their own problems: what stops the duopoly from purchasing regulatory capture and raising barriers to entry? That's a political problem, not an economic one. ;-)
- p4wnc6 11y ago
  I don't think I missed your point. I think I said that a rational duopoly won't bother worrying about what economical solution best prevents a third entrant, when there is always the possibility of simply paying from established wealth to compensate a would-be entrant for their willingness to not enter. I don't see it as a political problem. It's such a ubiquitous part of any real market that I just see it was a way in which typical econ toy problems fail to correspond to reality and fail to produce useful predictions. It's like trying to use Newtonian physics when quantum effects really matter, except you've got so many economists employed because of the Newtonian-like toy models and they have a real need to keep hand waving and trying to convince everyone that the Newtonian approximations matter, that deriving theoretical results like this matter to "build intuition" or "create the mathematical framework" or whatever, but it's just clearly not true or useful to anyone but those researchers themselves.

by p4wnc6 11y ago

cperciva 11y ago

I'm not sure I buy this because even if a third competitor entered and claimed nearly half of the market, the people far out in the tail of that claimed half would not experience any improvement in service. To them, they would be nearly just as bad off. You're missing my point. A rational duopoly which is concerned about the possibility of a third competitor entering the market will avoid satisfying Hotelling's law. It isn't the third competitor entering the market which improves things; it's the threat of a third competitor entering the market. I understand that regulations present their own problems: what stops the duopoly from purchasing regulatory capture and raising barriers to entry? That's a political problem, not an economic one. ;-)

p4wnc6 11y ago
I don't think I missed your point. I think I said that a rational duopoly won't bother worrying about what economical solution best prevents a third entrant, when there is always the possibility of simply paying from established wealth to compensate a would-be entrant for their willingness to not enter. I don't see it as a political problem. It's such a ubiquitous part of any real market that I just see it was a way in which typical econ toy problems fail to correspond to reality and fail to produce useful predictions. It's like trying to use Newtonian physics when quantum effects really matter, except you've got so many economists employed because of the Newtonian-like toy models and they have a real need to keep hand waving and trying to convince everyone that the Newtonian approximations matter, that deriving theoretical results like this matter to "build intuition" or "create the mathematical framework" or whatever, but it's just clearly not true or useful to anyone but those researchers themselves.