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On competition and endogenous firm efficiency

Author

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  • Pravin Krishna

    (Economics Department, Brown University, Providence, RI 02912, USA)

Abstract

Conventional wisdom holds that product market competition disciplines firms into efficiency of operation. However, in a well known paper, Martin (1993) has shown that in a linear Cournot setting (with costs determined first and product market competition taking place in a second stage) the exact opposite obtains - a larger number of firms competing in the market implies lower firm efficiency. The note clarifies further the links between market structure and efficiency. Specifically, it argues why (and how) the result derived by Martin (1993) depends upon the assumptions made regarding the structure of demand and nature of conjectures held by firms as to their rivals' behavior. An illustrative counter-example (with Bertrand behavior and non-linear demand) in which entry increases efficiency is provided as well.

Suggested Citation

  • Pravin Krishna, 2001. "On competition and endogenous firm efficiency," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 18(3), pages 753-760.
  • Handle: RePEc:spr:joecth:v:18:y:2001:i:3:p:753-760
    Note: Received: March 2, 2000; revised version: September 19, 2000
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    Cited by:

    1. Anil Arya & Hans Frimor & Brian Mittendorf, 2010. "Discretionary Disclosure of Proprietary Information in a Multisegment Firm," Management Science, INFORMS, vol. 56(4), pages 645-658, April.

    More about this item

    Keywords

    Competition; Endogenous efficiency; Managerial firms; Entry.;

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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