This article has grown out of the manuscript “Oligopolistic and Monopolistic Competition Unified.” Noriko Ishikawa contributed at the early stage of this research. We thank K.E. Spier and two referees for very useful comments and suggestions. We are also grateful to J. Adams, R. Amir, C. d’Aspremont, A. Bernard, M. Chemin, F. Dei, R. Dos Santos Ferreira, D. Encaoua, V. Ginsburgh, Ph. Martin, M. Moreau, R. Munk, Y. Murata, C. Oyarzun, M. Parenti, P. Rey, the late Koji Shimomura, D.-Z. Zeng, and L. Zhao for stimulating discussions and remarks. Shimomura acknowledges partial support from Grant-in-Aid for Scientific Research on Priority Areas 19046004 and Grant-in-Aid for Scientific Research (B) 20330036. Thisse is grateful to RIEB for its hospitality and financial support.
Competition among the big and the small
Article first published online: 19 JUN 2012
© 2012, RAND.
The RAND Journal of Economics
Volume 43, Issue 2, pages 329–347, Summer 2012
How to Cite
Shimomura, K.-I. and Thisse, J.-F. (2012), Competition among the big and the small. The RAND Journal of Economics, 43: 329–347. doi: 10.1111/j.1756-2171.2012.00168.x
- Issue published online: 19 JUN 2012
- Article first published online: 19 JUN 2012
Many industries are made up 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 procompetitive effect associated with entry dominates the resulting decrease in product diversity.