Monopoly and oligopoly provision of addictive goods

This article investigates monopoly and oligopoly provision of an addictive good. Consumer preferences are modeled as in Becker and Murphy (1988). Addi ctive goods have characteristics that create interesting strategic issues w hen suppliers are noncompetitive. We characterize the perfect Markov equili brium of a market with noncompetitive supply of an addictive good and compa re it with the efficient solution. Depending on particular parameter values , we find a wide variety of possible steady-state outcomes, including ones with output above the efficient level and price below marginal cost. We als o find that market power can be disadvantageous.