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Competition among large and heterogeneous small firms

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  • Pan, Lijun
  • Wang, Yongjin

Abstract

We extend the model of Parenti (2018) on large and small firms by introducing cost heterogeneity among small firms. We propose a novel necessary and sufficient condition for the existence of such a mixed market structure. Furthermore, in contrast to Parenti (2018), we show that in the presence of cost heterogeneity among small firms, trade liberalization may raise or reduce the mass of small firms in operation.

Suggested Citation

  • Pan, Lijun & Wang, Yongjin, 2020. "Competition among large and heterogeneous small firms," Economics Letters, Elsevier, vol. 196(C).
    • Handle: RePEc:eee:ecolet:v:196:y:2020:i:c:s0165176520303645
    DOI: 10.1016/j.econlet.2020.109604
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    References listed on IDEAS

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    1. Ken-Ichi Shimomura & Jacques-François Thisse, 2012. "Competition among the big and the small," RAND Journal of Economics, RAND Corporation, vol. 43(2), pages 329-347, June.
    2. Marc J. Melitz & Giancarlo I. P. Ottaviano, 2021. "Market Size, Trade, and Productivity," World Scientific Book Chapters, in: Firms and Workers in a Globalized World Larger Markets, Tougher Competition, chapter 4, pages 87-108, World Scientific Publishing Co. Pte. Ltd..
    3. Lijun Pan & Takatoshi Tabuchi, 2019. "Free Trade Agreement with Endogenous Market Structure," The Japanese Economic Review, Japanese Economic Association, vol. 70(4), pages 426-445, December.
    4. Parenti, Mathieu, 2018. "Large and small firms in a global market: David vs. Goliath," Journal of International Economics, Elsevier, vol. 110(C), pages 103-118.
    5. Simon P. Anderson & Nisvan Erkal & Daniel Piccinin, 2020. "Aggregative games and oligopoly theory: short‐run and long‐run analysis," RAND Journal of Economics, RAND Corporation, vol. 51(2), pages 470-495, June.
    6. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    7. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity (DOI:10.111/j.1467-937x.2007.00463.x)," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(3), pages 985-985.
    8. Lijun Pan & Makoto Hanazono, 2018. "Is a Big Entrant a Threat to Incumbents? The Role of Demand Substitutability in Competition Among the Big and the Small," Journal of Industrial Economics, Wiley Blackwell, vol. 66(1), pages 30-65, March.
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    More about this item

    Keywords

    Large firms; Small firms; Firm heterogeneity; Trade liberalization;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade

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