Market size and competition: A “hump-shaped” result |
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| Institution: | 1. KU Leuven, Belgium;2. CEPR, UK;3. InterMutualistisch Agentschap, Belgium;1. Faculty of Industrial Engineering and Management, Technion, Israel Institute of Technology, Israel;2. Department of Economics, Ben-Gurion University of the Negev, Israel;1. PUC-Chile;2. Tel-Aviv University;3. KU Leuven;1. Department of Economics, Finance and Legal Studies, The University of Alabama, 200 Alston Hall, Tuscaloosa, AL, 35487, USA;2. Econonomic Science Institute, Chapman Univeristy, One University Dr., Orange, CA 92866, USA;3. Department of Economics, Clemson University, 228 Sirrine Hall, Clemson, SC 29634, USA;1. University of Bayreuth, CESifo, and CEPR, Germany;2. Faculty of Law, Business and Economics, University of Bayreuth, Universitätsstr. 30, Bayreuth D-95440, Germany;3. University of Munich, CESifo, and CEPR, Germany;4. Department of Economics, University of Munich, Ludwigstr. 28 (Rgb.), München D-80539, Germany |
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| Abstract: | An active empirical literature estimates entry threshold ratios (ETRs), introduced by Bresnahan and Reiss (1991), to learn about the impact of firm entry on competition. We show that in the standard homogeneous goods oligopoly model, there is no monotonic relationship with the price-cost margin, one measure for the strength of competition. Regardless of the shape of demand, the ETR is hump-shaped in the number of active firms. It can also increase with entry in the Salop model of product differentiation or in a game of repeated interactions where collusion is possible. Empirical applications should use caution and only interpret changes in the ratio as indicative of a change in competition when the number of firms is sufficiently large. |
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