DP7404 Competition Among the Big and the Small

Author(s): Ken-Ichi Shimomura, Jacques-Fran├žois Thisse
Publication Date: August 2009
Keyword(s): monopolistic competition, oligopoly, product differentiation, welfare
JEL(s): L13, L40
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=7404

Armchair evidence shows that many industries are made of a few big commercial or manufacturing firms, which are able to affect the market outcome, and of a myriad of small family-run businesses with very few employees, each of which has a negligible impact on the market. Examples can be found in apparel, catering, publishers and bookstores, retailing, finance and insurances, and IT industries. We provide a new general equilibrium framework that encapsulates both market structures. Due to the higher toughness of the market, the entry of big firms leads them to sell more through a market expansion effect, which is generated by the exit of small firms. Furthermore, the level of social welfare increases with the number of oligopolistic firms because the procompetitive effect associated with the entry of a big firm dominates the resulting decrease in product variety.