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Competition Among the Big and the Small

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  • Shimomura, Ken-Ichi
  • Thisse, Jacques-François

Abstract

Armchair evidence shows that many industries are made of a few big commercial or manufacturing firms, which are able to affect the market outcome, and of a myriad of small family-run businesses with very few employees, each of which has a negligible impact on the market. Examples can be found in apparel, catering, publishers and bookstores, retailing, finance and insurances, and IT industries. We provide a new general equilibrium framework that encapsulates both market structures. Due to the higher toughness of the market, the entry of big firms leads them to sell more through a market expansion effect, which is generated by the exit of small firms. Furthermore, the level of social welfare increases with the number of oligopolistic firms because the procompetitive effect associated with the entry of a big firm dominates the resulting decrease in product variety.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7404.

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Date of creation: Aug 2009
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Handle: RePEc:cpr:ceprdp:7404

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Keywords: monopolistic competition; oligopoly; product differentiation; welfare;

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Cited by:
  1. USHCHEV, Philip & SLOEV, Igor & THISSE, Jacques-François & ,, 2013. "Do we go shopping downtown or in the ‘burbs’? Why not both?," CORE Discussion Papers 2013057, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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