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

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  • Gu, Yiquan
  • Wenzel, Tobias

Abstract

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.

Suggested Citation

  • Gu, Yiquan & Wenzel, Tobias, 2007. "A Note on the Excess Entry Theorem in Spatial Models with Elastic Demand," Ruhr Economic Papers 33, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
  • Handle: RePEc:zbw:rwirep:33
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    References listed on IDEAS

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    1. Hart, Oliver D, 1985. "Monopolistic Competition in the Spirit of Chamberlin: Special Results," Economic Journal, Royal Economic Society, vol. 95(380), pages 889-908, December.
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    6. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    7. 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.
    8. Oliver D. Hart, 1985. "Monopolistic Competition in the Spirit of Chamberlin: A General Model," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 529-546.
    9. 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, March.
    10. 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, June.
    11. Martin Peitz, 2002. "Price equilibrium in address models of product differentiation: unit-elastic demand," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 20(4), pages 849-860.
    12. Michael Sattinger, 1984. "Value of an Additional Firm in Monopolistic Competition," Review of Economic Studies, Oxford University Press, vol. 51(2), pages 321-332.
    13. Toshihiro Matsumura, 2000. "Entry regulation and social welfare with an integer problem," Journal of Economics, Springer, vol. 71(1), pages 47-58, February.
    14. 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 903-917, November.
    15. 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.
    16. Lancaster, Kelvin, 1975. "Socially Optimal Product Differentiation," American Economic Review, American Economic Association, vol. 65(4), pages 567-585, September.
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    Citations

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    Cited by:

    1. Stühmeier, Torben & Wenzel, Tobias, 2011. "Getting beer during commercials: Adverse effects of ad-avoidance," Information Economics and Policy, Elsevier, vol. 23(1), pages 98-106, March.
    2. Gu Yiquan & Wenzel Tobias, 2012. "Price-Dependent Demand in Spatial Models," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-26, March.
    3. Gu, Yiquan & Wenzel, Tobias, 2011. "Transparency, price-dependent demand and product variety," Economics Letters, Elsevier, vol. 110(3), pages 216-219, March.
    4. Esteves, Rosa-Branca & Reggiani, Carlo, 2014. "Elasticity of demand and behaviour-based price discrimination," International Journal of Industrial Organization, Elsevier, vol. 32(C), pages 46-56.
    5. repec:kap:revind:v:52:y:2018:i:1:d:10.1007_s11151-017-9568-x is not listed on IDEAS
    6. Javier Elizalde & Markus Kinateder & Ignacio Rodríguez-Carreño, 2015. "Entry regulation, firm’s behaviour and social welfare," European Journal of Law and Economics, Springer, vol. 40(1), pages 13-31, August.
    7. Keisuke Hattori & Takeshi Yoshikawa, 2016. "Free entry and social inefficiency under co-opetition," Journal of Economics, Springer, vol. 118(2), pages 97-119, June.
    8. Tim Paul Thomes, 2010. "Vertically Related Markets of Collective Licensing of Differentiated Copyrights with Indirect Network Effects," Jena Economic Research Papers 2010-056, Friedrich-Schiller-University Jena.
    9. Rasch, Alexander & Herre, Jesko, 2013. "Customer-side transparency, elastic demand, and tacit collusion under differentiation," Information Economics and Policy, Elsevier, vol. 25(1), pages 51-59.
    10. Fischer, Christian & Rasch, Alexander, 2018. "Complex pricing and consumer-side transparency," Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181642, Verein für Socialpolitik / German Economic Association.
    11. Brekke, Kurt R. & Garcia Pires, Armando J. & Schindler, Dirk & Schjelderup, Guttorm, 2017. "Capital taxation and imperfect competition: ACE vs. CBIT," Journal of Public Economics, Elsevier, vol. 147(C), pages 1-15.
    12. Marco Runkel, 2011. "Revenue Sharing, Competitive Balance and the Contest Success Function," German Economic Review, Verein für Socialpolitik, vol. 12(3), pages 256-273, August.
    13. Yiquan Gu & Tobias Wenzel, 2009. "Product Variety, Price Elasticity of Demand and Fixed Cost in Spatial Models," Ruhr Economic Papers 0092, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    14. Tobias Wenzel, 2010. "Liberalization of Opening Hours with Free Entry," German Economic Review, Verein für Socialpolitik, vol. 11, pages 511-526, November.
    15. Yiquan Gu & Alexander Rasch & Tobias Wenzel, 2016. "Price-sensitive demand and market entry," Papers in Regional Science, Wiley Blackwell, vol. 95(4), pages 865-875, November.
    16. Stefano Colombo, 2011. "Spatial price discrimination in the unidirectional Hotelling model with elastic demand," Journal of Economics, Springer, vol. 102(2), pages 157-169, March.
    17. Cato, Susumu & Matsumura, Toshihiro, 2013. "Entry-License Tax: Stackelberg versus Cournot," MPRA Paper 81297, University Library of Munich, Germany, revised 12 Sep 2017.
    18. repec:zbw:rwirep:0092 is not listed on IDEAS
    19. Gu, Yiquan & Wenzel, Tobias, 2009. "Product Variety, Price Elasticity of Demand and Fixed Cost in Spatial Models," Ruhr Economic Papers 92, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    20. Stefano Colombo, 2016. "Location choices with a non-linear demand function," Papers in Regional Science, Wiley Blackwell, vol. 95, pages 215-226, March.
    21. Frederick Guy, 2013. "Small, Local and Cheap? Walkable and Car-oriented Retail in Competition," Spatial Economic Analysis, Taylor & Francis Journals, vol. 8(4), pages 425-442, February.
    22. Toshihiro Matsumura & Yasunori Okumura, 2014. "Comparison between specific taxation and volume quotas in a free entry Cournot oligopoly," Journal of Economics, Springer, vol. 113(2), pages 125-132, October.
    23. Ralph M. Braid, 2014. "Search costs decrease prices in a model of spatial competition," Papers in Regional Science, Wiley Blackwell, vol. 93(1), pages 125-139, March.

    More about this item

    Keywords

    Elastic demand; spatial models; excess entry theorem;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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