The more the merrier? On the optimality of market size restrictions

Colin von Negenborn

Review of Economic Design, 2023, vol. 27, issue 3, No 6, 603-634

Abstract: Abstract This paper provides a novel rationale for the regulation of market size when heterogeneous firms compete. A regulator seeks to maximize total welfare by choosing the number of firms allowed to enter the market, e.g. by issuing a certain number of licenses. Opening up the market for more firms has a two-fold effect: it increases competition and thus welfare, but at the same time, it also attracts more cost-intensive firms, driving down average production efficiency. The regulator hence faces a trade-off between raising beneficial competition and detrimental costs. If goods are sufficiently substitutable, the latter effect can outweigh the former. It is then optimal to restrict the market size, rationalizing a limit to competition. This possibility result holds even in the absence of entry costs, search costs or increasing returns to scale, which previous literature required.

Keywords: Regulation; Imperfect competition; Oligopolies (search for similar items in EconPapers)
JEL-codes: D43 L13 L51 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Working Paper: The More the Merrier? On the Optimality of Market Size Restrictions (2019)
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DOI: 10.1007/s10058-022-00313-7

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