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Endogenous Market Structures and Welfare

Endogenous Market Structures and Welfare. by Federico Etro University of Venice, Ca ’ Foscari Saint Petersburg, October 2012 HSE Center of Market Studies and Spatial Economics. On the theory of EMS:. Strategic interactions between few firms and endogenous entry

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Endogenous Market Structures and Welfare

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  1. Endogenous Market StructuresandWelfare by Federico Etro University of Venice, Ca’ Foscari Saint Petersburg, October 2012 HSE Center of Market Studies and Spatial Economics

  2. On the theory of EMS: Strategic interactions between few firms and endogenous entry Folk theory on Cournot with EMS Dasgupta-Stiglitz (1980) Sutton bounds approach and Gabszewicz-Thisse Mankiw-Whinston (1986) excess entry result on welfare properties of EMS with homogenous goods

  3. On the theory of EMS: Dixit-Stiglitz (1977) monopolistic competition w/o strategic interactions and w CES preferences Krugman (1980) on trade Blanchard-Kiyotaki (1986) on macroeconomics Romer (1990) on growth What about welfare? Not much with CES: the eq. Is a second best Beyond CES: Zhelobodko et al. (2012)!!

  4. General EMS model Size of the economy: E Profitsoffirmi: Ex: quantitycompetitionwithhomogenous or differentiatedgoods (x=quantity); price competitionwithDixit-Stiglitz, exponentialdemand (1/x=price)

  5. General EMS model EMS ischaracterized by x and nthatsatisfy: Example: Cournot, hyperbolicdemandp=1/X and marginalcostc:

  6. On the theory of EMS: Leadership with free entry Dominant firm approach Bain-Sylos Labini-Modigliani Approach Contestable market approach Stackelberg competition with endogenous entry (Etro, 2004, 2008, EJ; Anderson, Erkal and Piccinin, 2012)

  7. Leadership with endogenous entry

  8. On the theory of EMS: Strategic investments (Etro, 2006, Rand) Mergers (Davidson and Mukherjee, 2007, IJIO; Erkal and Piccinin, 2010, ER) Vertical and incentive contracts and bundling (Etro, 2011, EER) Beneficial concentration (Ino and Matsumura, 2012, IER) Financial structure (Etro, 2010, CJE) what about welfare? Neutrality examples with CES

  9. Advertising!

  10. Traditional approach to market analysis: Structure Conduct Performance

  11. Size Conduct Performance Structure EMS approach to market analysis:

  12. On the theory of EMS: Dixit-Stiglitz (1977) with strategic interactions and CES preferences on trade (Etro, 2011 wp) on macroeconomics (Etro and Colciago, 2010, EJ; Bilbiie et al., 2012, JPE) on growth (Peretto, 1996; 2003)

  13. Questions: An EMS is characterized by too many firms and too little production? The strategies of a leader are beneficial or detrimental to consumer surplus?

  14. The Model Utility Budget constraint FOC

  15. Bertrand competition Demand Profits:

  16. since we can solve for the symmetric eq.price: and profits:

  17. EMS Number of firms: Strategies:

  18. Welfare analysis: Comparison with the Dixit-Stiglitz second best excess entry if: neutrality of CS to leaders only under CES

  19. Cournot competition Inverse demand Profits: We can solve for the symmetric eq. quantity:

  20. - we can solve for the symmetric eq.price: and profits: EMS:

  21. Welfare analysis: Comparison with the Dixit-Stiglitz second best excess entry if:

  22. Welfare analysis: competition fixes independently from the strategy of the leader therefore the number of firms is: so CS increases when the leader plays if:

  23. Welfare analysis:

  24. Welfare analysis: in general what matters is the elasticity of the utility: Implications for strategic investments, mergers, vertical contracts, bundling, concentrations..

  25. Conclusions Excess entry holds more in general and is pervasive: Dynamic inefficiency in dynamic models also with endogenous R&D (Vives, 2008) Leaders are CS-neutral with CES preferences ONLY Aggressive quantity-leaders are CS-increasing when the elasticity of utility is decreasing

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