On the Dilution of Market Power
32 Pages Posted: 19 Oct 2017 Last revised: 28 Nov 2017
Date Written: October 18, 2017
We show that a market involving a handful of large-scale firms and a myriad of small-scale firms may give rise to different types of market structure, ranging from monopoly or oligopoly to monopolistic competition through new types of market structure. In particular, we find conditions under which the free entry and exit of small firms incentivizes big firms to sell their varieties at the monopolistically competitive prices, behaving as if in monopolistic competition. We call this result the dilution of market power. The structure of preferences is the main driver for a specific market structure to emerge as an equilibrium outcome.
Keywords: dominant firms, monopolistically competitive fringe, monopolistic competition, oligo-poly, contestability
JEL Classification: D43, F12, L13
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