ICTI Professor Pedro Ferreira will speak at a seminar on Monday
Monday, November 2 at 12:00 – 1:30 p.m. in Hamburg Hall 1502.
Pedro is the ICTI@Portugal Principal Investigator for the ICTI Ph.D. Program in Engineering and Public Policy (EPP). He is currently a visiting professor at the Heinz College and is Assistant Professor in the Department of Electrical and Computer Engineering at Instituto Superior Técnico (IST).
Title: Economies of Scale vs. Market Power: An Analysis of Economic Efficiency and Application to the Telecommunications Industry
Abstract: “I study the economic efficiency of the Nash equilibrium in a market where a number of firms face linear decreasing marginal costs and compete to meet the linear demand from consumers. Economic efficiency is a measure of the relative aggregated welfare realized at Nash equilibrium and the maximum welfare that could be realized in the market if only one firm produced and priced at marginal cost. I show that Nash equilibrium exists under mild conditions and I show how its economic efficiency depends on the number of firms in the market and on the ratio between the slopes of the marginal cost curve and of the inverse demand function. In the absence of regulation, when this ratio is large, welfare is maximized at Nash equilibrium with only a few selfish firms in the market who realize the benefits of aggregated production. When this ratio is small, welfare is maximized at Nash equilibrium with many firms who cannot abuse excessively from market power given competition. Aggregated welfare is maximized with only one firm in the market if and only if this ratio is greater than 0.52. The economic efficiency loss of the Nash equilibrium is approximately given by this ratio for any number of firms in the market except when few firms with weak economies of scale compete. In the case of linear costs, economic efficiency loss, which is all due to the effect of market power, is at most 25%. I also provide an upper bound for the economic efficiency of the Nash equilibrium when similar firms face general concave costs. I discuss the application of these results to the telecommunications industry. In particularly, I show how provisioning clusters for High Performance Computing trades off with distributed Grid Computing to provide massive amounts of computing power.”