Is a Big Entrant a Threat to Incumbents? The Role of Demand Substitutability in Competition Among the Big and the Small
Lijun Pan and
Journal of Industrial Economics, 2018, vol. 66, issue 1, 30-65
We establish a model of market competition between large and small firms and investigate the way in which demand substitutability affects how the entry of big firms impacts incumbents. We focus on the relative strength of two opposing effects of entry on large incumbent firmsâ€™ demand: the direct substitution effect among large firms (negative) and the indirect feedback effect through the change in small firmsâ€™ aggregated behavior (positive). If the substitutability between large and small firms is sufficiently high, the indirect effect dominates the direct effect and large incumbentsâ€™ equilibrium prices and profits increase. We show that welfare effects are ambiguous, which calls for careful assessment when regulating large firmsâ€™ entry.
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jindec:v:66:y:2018:i:1:p:30-65
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