Market Structure, Scale Economies and Industry Performance

Abstract

We provide an extensive and general investigation of the effects on industry performance - profits, social welfare and price-cost margins - of exogenously changing the number of firms in Cournot markets. This includes an in-depth exploration of the well-known trade-off between competition and production efficiency. Most conventional beliefs actually require some qualifications to be valid. Under scale economies, welfare is maximized by a finite number of firms. Our results shed light on several policy debates in industrial organization, including the relationship between the Herfindahl index and social welfare, destructive competition and natural monopoly. Our analytical approach combines simplicity with generality

Keywords: Cournot oligopoly, returns to scale, entry, equilibrium comparative statics

JEL Classification: D43, D60, L13, L40