Working Paper: CEPR ID: DP7404
Authors: Kenichi Shimomura; Jacques-François Thisse
Abstract: Armchair evidence shows that many industries are made of a few big commercial or manufacturing firms, which are able to affect the market outcome, and of a myriad of small family-run businesses with very few employees, each of which has a negligible impact on the market. Examples can be found in apparel, catering, publishers and bookstores, retailing, finance and insurances, and IT industries. We provide a new general equilibrium framework that encapsulates both market structures. Due to the higher toughness of the market, the entry of big firms leads them to sell more through a market expansion effect, which is generated by the exit of small firms. Furthermore, the level of social welfare increases with the number of oligopolistic firms because the procompetitive effect associated with the entry of a big firm dominates the resulting decrease in product variety.
Keywords: monopolistic competition; oligopoly; product differentiation; welfare
JEL Codes: L13; L40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| entry of big firms (L26) | market expansion effect (F69) |
| market expansion effect (F69) | output of each big firm (L25) |
| entry of big firms (L26) | decrease in price index of the industry (L16) |
| entry of big firms (L26) | exit of small firms (L26) |
| exit of small firms (L26) | decrease in product variety (L15) |
| entry of big firms (L26) | increase in consumer welfare (D11) |
| regulatory environment (G38) | negative impact on job creation (F66) |
| regulatory environment (G38) | negative impact on overall market outcomes (F61) |