Market size and competition: a “hump-shaped” result

An active empirical literature estimates entry threshold ratios (ETRs), introduced by Bres- nahan 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 relation- ship 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 re- peated 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.

Publication year:2020

BOF-keylabel:yes

IOF-keylabel:yes

BOF-publication weight:0.5

CSS-citation score:1

Authors:International

Authors from:Private, Higher Education

Accessibility:Open