A Note on the Excess Entry Theorem in Spatial Models with Elastic Demand

18 Pages Posted: 31 Jan 2008

See all articles by Yiquan Gu

Yiquan Gu

University of Dortmund

Tobias Wenzel

Heinrich Heine University Dusseldorf - Duesseldorf Institute for Competition Economics (DICE)

Date Written: December 2007

Abstract

This paper revisits the excess entry theorem in spatial models à la Vickrey (1964) and Salop (1979) 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 demand is sufficiently inelastic. Otherwise, there is insufficient entry. In the limiting case of unit elastic demand, the market is monopolized. We point out when and how a public policy can be desirable and broaden our results with a more general transportation cost function.

Keywords: Elastic demand, spatial models, excess entry theorem

JEL Classification: L11, L13

Suggested Citation

Gu, Yiquan and Wenzel, Tobias, A Note on the Excess Entry Theorem in Spatial Models with Elastic Demand (December 2007). Ruhr Economic Paper No. 33, Available at SSRN: https://ssrn.com/abstract=1088346 or http://dx.doi.org/10.2139/ssrn.1088346

Yiquan Gu (Contact Author)

University of Dortmund ( email )

Dortmund, D-44221
Germany

Tobias Wenzel

Heinrich Heine University Dusseldorf - Duesseldorf Institute for Competition Economics (DICE) ( email )

Universitaetsstr. 1
Duesseldorf, NRW 40225
Germany

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