444. Consumption complementarities, monopolies and coordination

Paul Frijters, School of Economics Discussion Paper No. 444 1998, School of Economics, The University of Queensland. Australia.

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Abstract

Price-coordination and investment coordination are analyzed in a monopolistic multi-sector general equilibrium model with consumption complementarities. Possible solutions to the investment coordination problem are consistent with historical examples of government intervention in investment, the different roles of banking sectors in different countries, and the effect of optimism on the development of new sectors. Price coordination within sectors between monopolists of complementary intermediaries lowers prices and increases welfare because the competition between the final goods of different sectors then becomes the paramount concern of each monopolist. With no price coordination, each monopolist sets infinite prices as the effect of price increases on demand is shared by all other intermediary monopolists due to the complementarities.