Article | RAND Journal of Economics | fall 2010

Competition for Scarce Resources

by Peter Eso, Volker Nocke and Lucy White

Abstract

We model a downstream industry where firms compete to buy capacity in an upstream market that allocates capacity efficiently. Although downstream firms have symmetric production technologies, we show that industry structure is symmetric only if capacity is sufficiently scarce. Otherwise it is asymmetric, with one large, "fat," capacity-hoarding firm and a fringe of smaller, "lean," capacity-constrained firms. As demand varies, the industry switches between symmetric and asymmetric phases, generating predictions for firm size and costs across the business cycle. Surprisingly, increasing available capacity can cause a reduction in output and consumer surplus by resulting in such a switch.

Keywords: Competitive Strategy; Natural Environment; Technology; Production; Business Cycles; Forecasting and Prediction; Cost; Demand and Consumers; Industry Structures; Performance Capacity;

Citation:

Eso, Peter, Volker Nocke, and Lucy White. "Competition for Scarce Resources." RAND Journal of Economics 41, no. 3 (fall 2010): 524–548.