Competition Among the Big and the Small
Many industries are made of a few big firms, which are able to manipulate the market outcome, and of a host of small businesses, each of which has a negligible impact on the market. We provide a general equilibrium framework that encapsulates both market structures. Due to the higher toughness of competition, the entry of big firms leads them to sell more through a market expansion effect generated by the shrinking of the monopolistically competitive fringe. Furthermore, social welfare increases with the number of big firms because the pro-competitive effect associated with entry dominates the resulting decrease in product diversity.
oligopoly, monopolistic competition, product differentiation, welfare
Research Institute for Economics and Business Administration
Rokkodai-cho, Nada-ku, Kobe
CORE-Université catholique de Louvain (Belgium), CREA-Université du Luxembourg and CEPR