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Competition Among the Big and the Small

Competition Among the Big and the Small. Ken-Ichi Shimomura and Jacques-François Thisse.

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Competition Among the Big and the Small

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  1. Competition Among the Big and the Small Ken-Ichi Shimomura and Jacques-François Thisse

  2. Armchair evidence shows that many industries are characterized by the coexistence ofa few large commercial or manufacturing firms, which are able to affect the market outcome, as well as ofa myriad of small family-run businesseswith very few employees, each of which has a negligible impact on the market To the best of our knowledge, such amixed market structurehas been overlooked in the literature

  3. According to Schumpeter “In the case of retail trade the competition that matters arises not from additional shops of the same type, but from the department store, the chain store, the mail-order house and the supermarket which are bound to destroy those pyramids sooner or later”

  4. Bertrand and Kramarz (2002) have showed that the Royer-Raffarin Law that the enforcement of this law has had a negative impact on job creation.

  5. The purpose of this paper is precisely to provide aunifiedapproach to study (i) how those two types of firmsinteractto shape the market outcome and (ii) whether or not it issocially desirableto have large and/or small firms in business

  6. Two standard models of industrial organization theoligopoly à la Cournotwith differentiated products and themonopolistic competitionmodel of the Chamberlin-type

  7. discrete(atoms) andnegligiblevarieties of the differentiated product Themixed market structuremodel obeys different rules than standard oligopoly models A specific model CES

  8. The Model Twogoods Twoproduction sectors Oneproduction factor (labor) The first good is homogenousand produced underconstant returnsandperfect competition The other good is ahorizontally differentiatedproduct. It is supplied both byoligopolisticfirms and bymonopolistically competitivefirms (MC-firms)

  9. Two sub-sectors governed bydifferentforms of competition LetN > 1be the number of oligopolistic firms andM > 0the mass of MC-firms

  10. (i) A representative consumer Maximize subject to Price index of the MC-subsector

  11. Price index of the differentiated product Demand functions

  12. (ii) Oligopolistic firms (iii) MC-firms and

  13. The Market Outcome Amixed market equilibriumis defined as a state in which the following conditions simultaneously hold (i)the representative consumer maximizes her utility subject to the budget constraint (ii)both oligopolistic and MC-firms maximize their own profits with respect tooutput (iii)the mass of MC-firms ispositiveand they earnzero profitswhile oligopolistic firms earnpositive profits

  14. Firms are “income-takers” Asymmetricmixed market equilibrium in which all oligopolistic firms choose thesameoutputQ, whereas all MC-firms have thesameproduction policyq Equilibrium price indices

  15. Proposition 1. The price at which oligopolistic firms sell their outputdecreaseswhen the mass of MC-firmsincreasesProposition 2. There exists auniquesymmetric market equilibrium. This equilibrium is mixed if and only if …

  16. The Industry Structure Proposition 3. Both the equilibrium mass of MC-firms and quantity index of this sub-sectordecreasewhen the number of oligopolistic firmsincreases

  17. Proposition 4. The equilibrium output of an oligopolistic firmincreaseswhen the number of oligopolistic firmsrises The shrinking of the MC-sector generated by the entry of a large firm issufficiently strongto permit theexpansionof the output of each oligopolistic firm Proposition 5.The industry price indexdecreaseswhen the number of oligopolistic firmsincreases

  18. Is Schumpeter right? The MC-subsector disappears when the number of oligopolistic firms is sufficiently large

  19. Welfare Proposition 6. Consider a symmetric mixed market equilibrium, then,the total net incomeincreaseswhen the number of oligopolistic firmsincreases Proposition 7. Consider a symmetric mixed market equilibrium, thenthe social welfareincreaseswhen the number of oligopolistic firmsincreases

  20. CONCLUSIONS (i)A mixed market with several large firms and a small number of small firms ismore efficientthan a market with fewer large firms and a larger number of small firms

  21. (ii) Considering a traditional economy populated with small businesses, more affluent societies and technological progress have combined to facilitate the entry of a growing number of big firms. This in turn triggers the decline of small businesses in mixed markets endowed with old and small firms as well as modern and big firms. This concurs with the prediction made by many observers, ranging from Karl Marx to Robert Lucas. However, the fall in small firms' fixed costs sparked by the development of the new information technologies has permitted the revival of SMEs.

  22. THE BOTTOM LINESmall need not be beautiful

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