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More competitors or more competition? Market concentration and the intensity of competition

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  • Menezes, Flavio M.
  • Quiggin, John

Abstract

We present a model of competitive interaction among n symmetric firms producing a homogeneous good that includes both Bertrand and Cournot competition as special cases. In our model the intensity of competition is captured by a single parameter—the perceived slope of competitors’ supply functions. We show that total welfare increases monotonically with the intensity of competition and the number of competitors. We then examine how the intensity of competition affects the gains from changing the number of competitors. When competition is intense, most of the gains from extra competition are captured with the entry of a small number of firms and subsequent gains from entry are small. Conversely, when the intensity of competition is small, a reduction in the number of firms can have a large impact on welfare.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 117 (2012)
Issue (Month): 3 ()
Pages: 712-714

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Handle: RePEc:eee:ecolet:v:117:y:2012:i:3:p:712-714

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Keywords: Competition intensity; Number of competitors; Mergers;

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References

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  1. Flavio Menezes & John Quiggin, 2007. "Markets for Influence," Risk & Uncertainty Working Papers WP7R07, Risk and Sustainable Management Group, University of Queensland.
  2. Vives, Xavier, 2008. "Strategic supply function competition with private information," IESE Research Papers D/774, IESE Business School.
  3. Grant, Simon & Quiggin, John, 1996. "Capital Precommitment and Competition in Supply Schedules," Journal of Industrial Economics, Wiley Blackwell, vol. 44(4), pages 427-41, December.
  4. Flavio Menezes & John Quiggin, 2004. "Games without Rules," Risk & Uncertainty Working Papers WPR04_7, Risk and Sustainable Management Group, University of Queensland.
  5. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May.
  6. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
  7. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
  8. Robson, Arthur J., 1981. "Implicit oligopolistic collusion is destroyed by uncertainty," Economics Letters, Elsevier, vol. 7(1), pages 75-80.
  9. Grossman, Sanford J, 1981. "Nash Equilibrium and the Industrial Organization of Markets with Large Fixed Costs," Econometrica, Econometric Society, vol. 49(5), pages 1149-72, September.
  10. Turnbull, Stephen J., 1983. "Choosing duopoly solutions by consistent conjectures and by uncertainty," Economics Letters, Elsevier, vol. 13(2-3), pages 253-258.
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Cited by:
  1. Menezes, Flavio & Quiggin, John, 2013. "Inferring the strategy space from market outcomes," Risk and Sustainable Management Group Working Papers 151206, University of Queensland, School of Economics.
  2. Kao, Tina & Menezes, Flavio & Quiggin, John, 2012. "Optimal access regulation with downstream competition," Risk and Sustainable Management Group Working Papers 151201, University of Queensland, School of Economics.

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