Departmental Bulletin Paper Is a Big Entrant a Threat to Incumbents? The Role of Demand Substitutability in Competition among the Big and the Small

Pan, Lijun  ,  Hanazono, Makoto

(E16-3) 2016-05 , 名古屋大学大学院経済学研究科附属国際経済政策研究センター
Description
We establish a model of market competition among big and small firms and investigate how demand substitutability affects the impacts of big firms’ entry on incumbents. We identify two opposing effects of entry on the incumbent big firms’ demand: the direct substitution effect among the big firms (negative), and the indirect feedback effect through the change in the aggregated behavior of small firms (positive). If the substitutability between big and small firms is sufficiently high, the indirect effect dominates the direct effect, and the big incumbents’ equilibrium prices and profits increase. We show that the welfare effects are ambiguous, which calls for careful assessment for regulating big firms’ entry.
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