The More the Merrier? On the Optimality of Market Size Restrictions

Colin von Negenborn

No 183, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

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 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: 2019-09-18
New Economics Papers: this item is included in nep-bec, nep-com and nep-reg
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Journal Article: The more the merrier? On the optimality of market size restrictions (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:rco:dpaper:183

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