Competition Among the Big and the Small

Posted by D. Daniel Sokol

Ken-Ichi Shimomura (Research Institute for Economics and Business Administration, Kobe University) and Jacques-Francois Thisse (CORE-Universite catholique de Louvain) discuss Competition Among the Big and the Small.

ABSTRACT: 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.