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A Note on the Excess Entry Theorem in Spatial Models with Elastic Demand

  • Yiquan Gu

    ()

  • Tobias Wenzel

    ()

This paper revisits the excess entry theorem in spatial models à la Vickrey (1964) and Salop (1979) while relaxing the assumption of inelastic demand. Using a demand function with a constant demand elasticity, we show that the number of firms that enter a market decreases with the degree of demand elasticity.We find that the excess entry theorem does only hold when demand is sufficiently inelastic. Otherwise, there is insufficient entry. In the limiting case of unit elastic demand, the market is monopolized. We point out when and how a public policy can be desirable and broaden our results with a more general transportation cost function.

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Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0033.

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Length: 18 pages
Date of creation: Dec 2007
Date of revision:
Handle: RePEc:rwi:repape:0033
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  1. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  2. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  3. Shin-Kun Peng & Takatoshi Tabuchi, 2007. "Spatial Competition in Variety and Number of Stores," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(1), pages 227-250, 03.
  4. Simon P. Anderson & Andre de Palma, 1998. "From Local to Global Competition," Virginia Economics Online Papers 344, University of Virginia, Department of Economics.
  5. Matsumura, Toshihiro & Okamura, Makoto, 2006. "Equilibrium number of firms and economic welfare in a spatial price discrimination model," Economics Letters, Elsevier, vol. 90(3), pages 396-401, March.
  6. Hart, Oliver D, 1985. "Monopolistic Competition in the Spirit of Chamberlin: A General Model," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 529-46, October.
  7. Rath, Kali P. & Zhao, Gongyun, 2001. "Two stage equilibrium and product choice with elastic demand," International Journal of Industrial Organization, Elsevier, vol. 19(9), pages 1441-1455, November.
  8. Toshihiro Matsumura, 2000. "Entry regulation and social welfare with an integer problem," Journal of Economics, Springer, vol. 71(1), pages 47-58, February.
  9. Bockem, Sabine, 1994. "A Generalized Model of Horizontal Product Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 42(3), pages 287-98, September.
  10. Pettengill, John S, 1979. "Monopolistic Competition and Optimum Product Diversity: Comment," American Economic Review, American Economic Association, vol. 69(5), pages 957-60, December.
  11. Shin-Kun Peng & Takatoshi Tabuchi, 2007. "Erratum: Spatial Competition in Variety and Number of Stores," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(2), pages 537-537, 06.
  12. Sattinger, Michael, 1984. "Value of an Additional Firm in Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 51(2), pages 321-32, April.
  13. Matsumura, Toshihiro & Okamura, Makoto, 2006. "A note on the excess entry theorem in spatial markets," International Journal of Industrial Organization, Elsevier, vol. 24(5), pages 1071-1076, September.
  14. Lancaster, Kelvin, 1975. "Socially Optimal Product Differentiation," American Economic Review, American Economic Association, vol. 65(4), pages 567-85, September.
  15. Martin Peitz, 2002. "Price equilibrium in address models of product differentiation: unit-elastic demand," Economic Theory, Springer, vol. 20(4), pages 849-860.
  16. Jonathan H Hamilton & James F. Klein & Eytan Sheshinski & Steven M. Slutsky, 1994. "Quantity Competition in a Spatial Model," Canadian Journal of Economics, Canadian Economics Association, vol. 27(4), pages 903-17, November.
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