Monday, February 20, 2023

Oligopoly Pricing: The Role of Firm Size and Number

By: Iwan Bos (Department of Organisation, Strategy and Entrepreneurship, Maastricht University); Marco A. Marini (Department of Social Sciences and Economics, Sapienza University of Rome)
Abstract: This paper examines a homogeneous-good Bertrand-Edgeworth oligopoly model to explore the role of firm size and number in pricing. We consider the price impact of merger, breakup, investment, divestment, entry, and exit. A merger leads to higher prices only when it increases the size of the largest seller and industry capacity is neither too big nor too small post-merger. Similarly, breaking-up a firm only leads to lower prices when it concerns the biggest producer and aggregate capacity is within an intermediate range. Investment and entry (weakly) reduce prices, whereas divestment and exit yield (weakly) higher prices. Taken together, these findings suggest that size matters more than number in the determination of oligopoly prices.

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