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How Many Firms Should Be Leaders? Beneficial Concentration Revisited

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  • Hiroaki Ino
  • Toshihiro Matsumura

Abstract

We investigate the relationship between the Herfindahl-Hirschman Index (HHI) and welfare. First, we discuss the model wherein m leaders and N - m followers compete. Daughety (1990) finds that under linear demand and constant marginal cost, the Stackelberg model yields larger welfare and HHI than the Cournot model. Thus, he demonstrates that beneficial concentration occurs. We find that this always occurs under general cost and demand functions when m is sufficiently large, but does not always occur when m is small. Next, we consider the free entry of followers, and find that beneficial concentration always occurs regardless of m. In particular, the more persistent the leadership, the more likely it is to be beneficial.

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File URL: http://hdl.handle.net/10.1111/j.1468-2354.2012.00722.x
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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 53 (2012)
Issue (Month): 4 (November)
Pages: 1323-1340

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Handle: RePEc:wly:iecrev:v:53:y:2012:i:4:p:1323-1340

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Cited by:
  1. Etro, Federico, 2013. "Advertising and search engines. A model of leadership in search advertising," Research in Economics, Elsevier, vol. 67(1), pages 25-38.
  2. Federico Etro, 2014. "Some thoughts on the Sutton approach," Journal of Economics, Springer, vol. 112(2), pages 99-113, June.
  3. Scrimitore, Marcella, 2010. "Managerial Incentives and Stackelberg Equilibria in Oligopoly," MPRA Paper 24245, University Library of Munich, Germany.

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