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Does the Excess Entry Theorem Hold in a Differentiated Oligopoly?
Author(s) -
Kagitani Koichi,
Ohkawa Takao,
Okamura Makoto
Publication year - 2016
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12104
Subject(s) - economics , product differentiation , complementarity (molecular biology) , oligopoly , microeconomics , social welfare , welfare , competition (biology) , bertrand competition , collusion , free entry , market economy , cournot competition , ecology , genetics , political science , law , biology
Though it is generally believed that increasing competition improves social welfare, we are able to show with a S hubik– L evitan demand function for differentiated goods that this is not always the case. Under C ournot and B ertrand competition, market entry increases the equilibrium total output and lowers the equilibrium price in the case of substitutes, but it reduces the total output and raises the price in the case of complements. In the long run, the equilibrium number of firms is excessive and the equilibrium cannot achieve even the second‐best social welfare under either type of competition, regardless of product substitutability or complementarity.