A note on the excess entry theorem in spatial models with elastic demand |
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Authors: | Yiquan Gu Tobias Wenzel |
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Institution: | aTechnische Universität Dortmund, Department of Economics and Social Science, Vogelpothsweg 87, 44227 Dortmund, Germany;bUniversität Erlangen-Nürnberg, Department of Economics, Lange Gasse 20, 90403 Nürnberg, Germany;cRuhr Graduate School in Economics, Germany |
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Abstract: | This paper revisits the excess entry theorem in spatial models according to Vickrey Vickrey, W.S., 1964. Microstatics. Harcourt, Brace and World, New York] and Salop Salop, S., 1979. Monopolistic competition with outside goods. Bell Journal of Economics 10, 141–156] while relaxing the assumption of inelastic demand. Using a demand function with a constant demand elasticity, we show that the number of firms that enter a market decreases with the degree of demand elasticity. We find that the excess entry theorem does only hold when the demand elasticity is sufficiently small. Otherwise, there is insufficient entry. In the limiting case of unit elastic demand, the market is monopolized. We broaden our results with a more general transportation cost function. |
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Keywords: | Elastic demand Spatial models Excess entry theorem |
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