DP12367 On the Dilution of Market Power

Author(s): Sergey Kokovin, Mathieu Parenti, Jacques-François Thisse, Philip Ushchev
Publication Date: October 2017
Keyword(s): contestable markets, Dominant firms, monopolistic competition, monopolistically competitive fringe, oligopoly
JEL(s): D43, F12, L13
Programme Areas: Industrial Organization, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12367

We show that a market involving a handful of large-scale firms and a myriad of small-scale firms may give rise to different types of market structure, ranging from monopoly or oligopoly to monopolistic competition through new types of market structure. In particular, we find conditions under which the free entry and exit of small firms incentivizes big firms to sell their varieties at the monopolistically competitive prices, behaving as if in monopolistic competition. We call this result the dilution of market power. The structure of preferences is the main driver for a specific market structure to emerge as an equilibrium outcome.