Competition and Efficiency in Congested Markets

We study the efficiency of oligopoly equilibria in congested markets. The motivating examples are the allocation of network flows in a communication network or of traffic in a transportation network. We show that increasing competition among oligopolists can reduce efficiency, measured as the difference between users’ willingness to pay and delay costs. We characterize a tight bound of 5/6 on efficiency in pure strategy equilibria when there is zero latency at zero flow and a tight bound of 2 √ 2− 2 with positive latency at zero flow. These bounds are tight even when the numbers of routes and oligopolists are arbitrarily large. ∗We thank Xin Huang, Ramesh Johari, Eric Maskin, Eilon Solan, Nicolas Stier Moses, Jean Tirole, John Tsitsiklis, Ivan Werning, Muhamet Yildiz, two anonymous referees and participants at various seminars and conferences for useful comments.