Munich Personal RePEc Archive

On Equilibrium Number of Firms

Selim, Tarek (2006): On Equilibrium Number of Firms. Published in: Atlantic Economic Journal , Vol. 34, No. 4 (December 2006)

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This article provides a simple account of the effect of quality competition on the extent of sequential entry accommodation for a differentiated oligopoly market characterized by locational differentiation. The model is solved with consumers seeking a “love for quality” surplus utility while firms maximize economic profits constrained by their chosen level of quality location as endogenized within a given spectrum of locational quality differentiation. Initially, a duopoly market is considered, followed by successive market entry until a differentiated oligopoly market is completely saturated, or “fully covered”. Analysis of market concentration follows the sequential accommodation of market entry and is studied based on non-collusive industry-wide profitability using an augmented form of the Hirschman-Herfindahl concentration index. The level of available production technology is implicit in maximum quality location possible. In general, it is found that the degree of quality differentiation greatly affects the extent of market saturation and long run concentration. More differentiation asymmetry between firms deepens the marginal (negative) technological impact on long run concentration; with a less-than-proportionate change in the equilibrium number of firms. In the limit, several categories of behavior are studied, which imply a more competitive, less competitive, or “technology-neutral” market structure.

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