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The Impact of Competition on Prices with Numerous Firms

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Author Info

  • Xavier Gabaix

    ()
    (NYU Stern, CEPR and NBER)

  • David Laibson

    ()
    (Harvard University and NBER)

  • Deyuan Li

    ()
    (Fudan University)

  • Hongyi Li

    ()
    (University of New South Wales)

  • Sidney Resnick

    ()
    (Cornell University)

  • Casper G. de Vries

    ()
    (Economic Science Institute, Chapman University, Erasmus University Rotterdam, Tinbergen Institute)

Abstract

We use extreme value theory (EVT) to develop insights about price theory. Our analysis reveals "detail-independent" equilibrium properties that characterize a large family of models. We derive a formula relating equilibrium prices to the level of competition. When the number of firms is large, markups and prices are pinned down by the tail properties of the noise distribution and prices are independent of many other institutional details. The elasticity of the markup with respect to the number of firms is shown to be the EVT tail exponent of the distribution for preference shocks and in most leading cases is relatively insensitive to the number of firms. For example, for the Gaussian case asymptotic markups are proportional to one over the square root of log n, implying a zero asymptotic elasticity of the markup with respect to the number of firms. Thus competition only exerts weak pressure on prices. We also study applications of the model, including endogenizing the level of noise.

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Bibliographic Info

Paper provided by Chapman University, Economic Science Institute in its series Working Papers with number 13-07.

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Length: 74 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:chu:wpaper:13-07

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References

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  3. Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc.
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  8. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," NBER Working Papers 12365, National Bureau of Economic Research, Inc.
  9. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2009. "New Keynesian Models: Not Yet Useful for Policy Analysis," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 242-66, January.
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  13. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
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  17. Xavier Gabaix, 1999. "Zipf'S Law For Cities: An Explanation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 739-767, August.
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Cited by:
  1. E. Glen Weyl & Michal Fabinger, 2013. "Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition," Journal of Political Economy, University of Chicago Press, vol. 121(3), pages 528 - 583.
  2. Simon GB Cowan, 2013. "Welfare-increasing third-degree price discrimination," Economics Series Working Papers 652, University of Oxford, Department of Economics.

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