On competition and endogenous firm efficiency |
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Authors: | Pravin Krishna |
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Institution: | (1) Economics Department, Brown University, Providence, RI 02912, USA , US |
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Abstract: | Summary. Conventional wisdom holds that product market competition disciplines firms into efficiency of operation. However, in a well
known paper, Martin (1993) has shown that in a linear Cournot setting (with costs determined first and product market competition
taking place in a second stage) the exact opposite obtains – a larger number of firms competing in the market implies lower
firm efficiency. The note clarifies further the links between market structure and efficiency. Specifically, it argues why
(and how) the result derived by Martin (1993) depends upon the assumptions made regarding the structure of demand and nature
of conjectures held by firms as to their rivals' behavior. An illustrative counter-example (with Bertrand behavior and non-linear
demand) in which entry increases efficiency is provided as well.
Received: March 2, 2000; revised version: September 19, 2000 |
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Keywords: | and Phrases:Competition Endogenous efficiency Managerial firms Entry |
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