On the Dilution of Market Power

Kokovin, Sergey ; Parenti, Mathieu ; Thisse, Jacques-François ; Ushchev, Philip provide thoughts On the Dilution of Market Power.

ABSTRACT: We show that a market involving a handful of large-scale firms and a myriad of small-scale businesses 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 the big firms to sell their varieties at the monopolistically competitive prices, as if they were to behave like in monopolistic competition. We call this result dilution of market power. The structure of preferences is the main driver for a specific market structure to emerge as an equilibrium outcome.