Vanity and Congestion: A Study of Reciprocal Externalities

This paper models a private goods oligopoly market characterized by negative and reciprocal externalities. Although firms compete in prices, and products are undifferentiated in equilibrium, the price-cost margin turns out to be positive. From a social perspective, the equilibrium price is higher than what is motivated by the negative externality. Hence welfare can be improved by means of a price ceiling. Finally, industries with high fixed costs would be expected to exhibit a high degree of concentration on the supply side and considerable price-cost margins.