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A Note on the Adverse Effect of Competition on Consumers

Authors


  • We thank an associate editor, two anonymous referees, and Tarun Kabiraj for helpful comments and suggestions. The usual disclaimer applies.

Abstract

It is usually believed that higher competition, implying more active firms, benefits consumers. We show that this may not be the case in an industry with asymmetric cost firms. A rise in the number of more cost-inefficient firms makes the consumers worse off in the presence of a welfare-maximizing tax/subsidy policy. A rise in the number of more cost-inefficient firms also reduces social welfare.

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