On competition and endogenous firm efficiency

Pravin Krishna

Economic Theory, 2001, vol. 18, issue 3, 753-760

Abstract: Conventional wisdom holds that product market competition disciplines firms into efficiency of operation. However, in a well known paper, Martin (1993) has shown that in a linear Cournot setting (with costs determined first and product market competition taking place in a second stage) the exact opposite obtains - a larger number of firms competing in the market implies lower firm efficiency. The note clarifies further the links between market structure and efficiency. Specifically, it argues why (and how) the result derived by Martin (1993) depends upon the assumptions made regarding the structure of demand and nature of conjectures held by firms as to their rivals' behavior. An illustrative counter-example (with Bertrand behavior and non-linear demand) in which entry increases efficiency is provided as well.

Keywords: Competition; Endogenous efficiency; Managerial firms; Entry. (search for similar items in EconPapers)
JEL-codes: F02 F12 F13 F15 (search for similar items in EconPapers)
Date: 2001-06-11
Note: Received: March 2, 2000; revised version: September 19, 2000
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Citations: View citations in EconPapers (4)

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