Does Market Size Matter? A Dynamic Model of Oligopolistic Market Structure, Featuring Costs of Creating and Maintaining a Market Position

42 Pages Posted: 12 Jan 2014

See all articles by Harry Bloch

Harry Bloch

Curtin University of Technology - Curtin Business School - School of Economics and Finance

B. Curtis Eaton

University of Calgary

R. Rothschild

Lancaster University - Department of Economics

Date Written: June 12, 2013

Abstract

In their efforts to create a position in a market, and to maintain that position, firms make positioning investments of various sorts, in R&D, plant, advertising, and location, or more generally, in product development and maintenance. The heart of this paper is the hypothesis that the success of these positioning investments is not assured. In an environment where the success of positioning investments is stochastic, the positioning game played by firms that compete to serve a market is necessarily dynamic. We model the positioning and operating decisions of firms in an environment of this sort. When the market is large enough to support at least one active firm, the expected number of firms serving the market at a point in time is a nearly continuous function of market size, in sharp contrast to the familiar integer valued step function seen in classic models of market structure. As a result, equilibrium expected total surplus and expected consumer surplus are higher than standard non-stochastic models would suggest, especially in circumstances where the expected number of firms is small. This suggests that classic models of market structure are not always a sound guide for policy.

Keywords: Oligopoly, rm entry and market structure

JEL Classification: D43, L11

Suggested Citation

Bloch, Harry and Eaton, B. Curtis and Rothschild, R., Does Market Size Matter? A Dynamic Model of Oligopolistic Market Structure, Featuring Costs of Creating and Maintaining a Market Position (June 12, 2013). CRAE Research Paper No. 04072013. Available at SSRN: https://ssrn.com/abstract=2378090 or http://dx.doi.org/10.2139/ssrn.2378090

Harry Bloch (Contact Author)

Curtin University of Technology - Curtin Business School - School of Economics and Finance ( email )

Curtin University
GPO Box U 1987
Perth, 6845
Australia
+61 8 9266 2035 (Phone)
+61 8 9266 3026 (Fax)

B. Curtis Eaton

University of Calgary

R. Rothschild

Lancaster University - Department of Economics ( email )

Bailrigg
Lancaster LA1 4YX
United Kingdom
+441524594217 (Phone)
+441524594244 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
51
Abstract Views
501
rank
396,790
PlumX Metrics