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Intensity of Competition and the Number of Competitors

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  • Menezes, Flavio
  • Quiggin, John

Abstract

We setup a model of competitive interaction among symmetric firms producing a homogeneous good that includes both Bertrand and Cournot competition as special cases. In our model the intensity of competition is captured by a single parameter - the perceived slope of competitors' supply functions. We show when the number of firms is fixed, total welfare increases monotonically with the degree of competition. We then examine how the intensity of competition affects the gains from changing the number of competitors. For very intense competition, most of the gains from extra competition are captured with the entry of a small number of firms and subsequent gains from entry are small. Conversely, when the intensity of competition is small, a reduction in the number of firms can have a large impact on welfare. We also examine the case when the intensity of competition is a function of the number of firms in the market and provide a sufficient condition for mergers to be profitable.

Suggested Citation

  • Menezes, Flavio & Quiggin, John, 2011. "Intensity of Competition and the Number of Competitors," Risk and Sustainable Management Group Working Papers 151197, University of Queensland, School of Economics.
  • Handle: RePEc:ags:uqsers:151197
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    File URL: http://ageconsearch.umn.edu/record/151197/files/RSMG%20Working%20Paper%20R11_3.pdf
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    References listed on IDEAS

    as
    1. Grant, Simon & Quiggin, John, 1996. "Capital Precommitment and Competition in Supply Schedules," Journal of Industrial Economics, Wiley Blackwell, vol. 44(4), pages 427-441, December.
    2. Turnbull, Stephen J., 1983. "Choosing duopoly solutions by consistent conjectures and by uncertainty," Economics Letters, Elsevier, vol. 13(2-3), pages 253-258.
    3. Stephen W. Salant & Sheldon Switzer & Robert J. Reynolds, 1983. "Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 185-199.
    4. Grossman, Sanford J, 1981. "Nash Equilibrium and the Industrial Organization of Markets with Large Fixed Costs," Econometrica, Econometric Society, vol. 49(5), pages 1149-1172, September.
    5. Ugur Akgün, 2004. "Mergers With Supply Functions," Journal of Industrial Economics, Wiley Blackwell, vol. 52(4), pages 535-546, December.
    6. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-1277, November.
    7. Robson, Arthur J., 1981. "Implicit oligopolistic collusion is destroyed by uncertainty," Economics Letters, Elsevier, vol. 7(1), pages 75-80.
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    Keywords

    Industrial Organization;

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