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A simple model of natural oligopoly with an unlimited number of firms

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  • Prasad Krishnamurthy

    (University of California, Berkeley)

Abstract

In vertical models of product differentiation, consumers agree on their ranking of product quality but differ in their willingness to pay for it. When product quality is bounded and the range of willingness to pay is narrow, there are ``natural oligopoly'' equilibria in which a finite number of firms enter the market regardless of market size. I relax both of these assumptions and consider a simple vertical model in which the number of entering firms increases with market size. I derive analytical expressions for equilibrium prices, markups, and shares for any number of entering firms and limiting expressions for market shares and concentration as the number of firms grows large. The limiting market structure is highly concentrated. The market share of the largest firm converges from above to .58, the combined share of the four largest firms to .99, and the HHI to .44 (4,400). I conclude that vertical models can give rise to natural oligopoly when the range of quality is unbounded and the number of entering firms is unlimited.

Suggested Citation

  • Prasad Krishnamurthy, 2025. "A simple model of natural oligopoly with an unlimited number of firms," Economics Bulletin, AccessEcon, vol. 45(2), pages 896-909.
    • Handle: RePEc:ebl:ecbull:eb-24-00506
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    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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