Market Size and Competition: A 'Hump-Shaped' Result

20 Pages Posted: 7 Oct 2019

See all articles by Iris Grant

Iris Grant

KU Leuven - Department of Economics

Iris Kesternich

KU Leuven - Department of Economics; Ludwig Maximilian University of Munich (LMU) - Faculty of Economics

Heiner Schumacher

KU Leuven

Johannes Van Biesebroeck

K.U.Leuven; Centre for Economic Policy Research (CEPR)

Date Written: September 2019

Abstract

An active empirical literature estimates entry threshold ratios, introduced by Bresnahan and Reiss (1991), to learn about the impact of firm entry on the strength of competition. These ratios measure the increase in minimum market size needed per firm to sustain one additional firm in the market. We show that there is no monotonic relationship between a change in the entry threshold ratio and a change in the strength of competition or in the price-cost margin. In the standard homogenous goods oligopoly model with linear or constant elasticity demand, the ratio is hump-shaped in the number of active firms, increasing at first and only when additional firms enter it gradually decreases and converges to one. Empirical applications should use caution and interpret changes in the entry threshold ratios as indicative of changes in competition only from the third entrant onwards.

Keywords: Competition, Entry Threshold Ratio, Market entry, market size

JEL Classification: D43, L13

Suggested Citation

Grant, Iris and Kesternich, Iris and Schumacher, Heiner and Van Biesebroeck, Johannes, Market Size and Competition: A 'Hump-Shaped' Result (September 2019). CEPR Discussion Paper No. DP14009. Available at SSRN: https://ssrn.com/abstract=3464538

Iris Grant (Contact Author)

KU Leuven - Department of Economics ( email )

Leuven, B-3000
Belgium

Iris Kesternich

KU Leuven - Department of Economics ( email )

Leuven, B-3000
Belgium

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

Heiner Schumacher

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Johannes Van Biesebroeck

K.U.Leuven ( email )

Naamsestraat 69
B-3000 Leuven
Belgium
+3216326793 (Phone)
+3216326796 (Fax)

HOME PAGE: http://www.econ.kuleuven.be/public/N07057/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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