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A note on the excess entry theorem in spatial models with elastic demand

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  • Gu, Yiquan
  • Wenzel, Tobias

Abstract

This paper revisits the excess entry theorem in spatial models according to Vickrey [Vickrey, W.S., 1964. Microstatics. Harcourt, Brace and World, New York] and Salop [Salop, S., 1979. Monopolistic competition with outside goods. Bell Journal of Economics 10, 141-156] while relaxing the assumption of inelastic demand. Using a demand function with a constant demand elasticity, we show that the number of firms that enter a market decreases with the degree of demand elasticity. We find that the excess entry theorem does only hold when the demand elasticity is sufficiently small. Otherwise, there is insufficient entry. In the limiting case of unit elastic demand, the market is monopolized. We broaden our results with a more general transportation cost function.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 27 (2009)
Issue (Month): 5 (September)
Pages: 567-571

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Handle: RePEc:eee:indorg:v:27:y:2009:i:5:p:567-571

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Web page: http://www.elsevier.com/locate/inca/505551

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Keywords: Elastic demand Spatial models Excess entry theorem;

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References

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  1. Matsumura, Toshihiro & Okamura, Makoto, 2006. "Equilibrium number of firms and economic welfare in a spatial price discrimination model," Economics Letters, Elsevier, vol. 90(3), pages 396-401, March.
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  3. Shin-Kun Peng & Takatoshi Tabuchi, 2006. "Spatial Competition in Variety and Number of Stores," IEAS Working Paper : academic research 06-A002, Institute of Economics, Academia Sinica, Taipei, Taiwan.
  4. Bockem, Sabine, 1994. "A Generalized Model of Horizontal Product Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 42(3), pages 287-98, September.
  5. Shin-Kun Peng & Takatoshi Tabuchi, 2007. "Erratum: Spatial Competition in Variety and Number of Stores," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(2), pages 537-537, 06.
  6. Sattinger, Michael, 1984. "Value of an Additional Firm in Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 51(2), pages 321-32, April.
  7. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  8. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  9. Lancaster, Kelvin, 1975. "Socially Optimal Product Differentiation," American Economic Review, American Economic Association, vol. 65(4), pages 567-85, September.
  10. Martin Peitz, 2002. "Price equilibrium in address models of product differentiation: unit-elastic demand," Economic Theory, Springer, vol. 20(4), pages 849-860.
  11. Jonathan H Hamilton & James F. Klein & Eytan Sheshinski & Steven M. Slutsky, 1994. "Quantity Competition in a Spatial Model," Canadian Journal of Economics, Canadian Economics Association, vol. 27(4), pages 903-17, November.
  12. Hart, Oliver D, 1985. "Monopolistic Competition in the Spirit of Chamberlin: A General Model," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 529-46, October.
  13. Pettengill, John S, 1979. "Monopolistic Competition and Optimum Product Diversity: Comment," American Economic Review, American Economic Association, vol. 69(5), pages 957-60, December.
  14. Matsumura, Toshihiro & Okamura, Makoto, 2006. "A note on the excess entry theorem in spatial markets," International Journal of Industrial Organization, Elsevier, vol. 24(5), pages 1071-1076, September.
  15. Toshihiro Matsumura, 2000. "Entry regulation and social welfare with an integer problem," Journal of Economics, Springer, vol. 71(1), pages 47-58, February.
  16. Rath, Kali P. & Zhao, Gongyun, 2001. "Two stage equilibrium and product choice with elastic demand," International Journal of Industrial Organization, Elsevier, vol. 19(9), pages 1441-1455, November.
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Citations

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Cited by:
  1. Tobias Wenzel, 2007. "Liberalization of Opening Hours with Free Entry," Ruhr Economic Papers 0013, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  2. Marco Runkel, 2008. "Revenue Sharing, Competitive Balance and the Contest Success Function," FEMM Working Papers 08012, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
  3. Gu, Yiquan & Wenzel, Tobias, 2010. "Transparency, price-dependent demand and product variety," DICE Discussion Papers 04, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  4. Esteves, Rosa-Branca & Reggiani, Carlo, 2014. "Elasticity of demand and behaviour-based price discrimination," International Journal of Industrial Organization, Elsevier, vol. 32(C), pages 46-56.
  5. Stühmeier, Torben & Wenzel, Tobias, 2011. "Getting beer during commercials: Adverse effects of ad-avoidance," Information Economics and Policy, Elsevier, vol. 23(1), pages 98-106, March.
  6. Gu, Yiquan & Wenzel, Tobias, 2009. "Product variety, price elasticity of demand and fixed cost in spatial models," IWQW Discussion Paper Series 03/2009, Friedrich-Alexander-Universität Erlangen-Nürnberg, Institut für Wirtschaftspolitik und Quantitative Wirtschaftsforschung (IWQW).
  7. Gu Yiquan & Wenzel Tobias, 2012. "Price-Dependent Demand in Spatial Models," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-26, March.
  8. Tim Paul Thomes, 2010. "Vertically Related Markets of Collective Licensing of Differentiated Copyrights with Indirect Network Effects," Jena Economic Research Papers 2010-056, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  9. Stefano Colombo, 2011. "Spatial price discrimination in the unidirectional Hotelling model with elastic demand," Journal of Economics, Springer, vol. 102(2), pages 157-169, March.
  10. Hattori, Keisuke & Yoshikawa, Takeshi, 2013. "Free Entry and Social Inefficiency under Co-opetition," MPRA Paper 44816, University Library of Munich, Germany.
  11. Rasch, Alexander & Herre, Jesko, 2013. "Customer-side transparency, elastic demand, and tacit collusion under differentiation," Information Economics and Policy, Elsevier, vol. 25(1), pages 51-59.

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