L17: Entry and Market Structure

Question 1

if a market is concentrated, should we worry?

Answer 1

no
- efficient firms enter and inefficient firms stay out
- markets are contestable
- rents are necessary to cover continuously spent sunk costs
- incentives to innovate are stronger in concentrated markets

yes
- incumbents create barriers to entry to generate monopolistic rents
- smaller number of firms ease collusion

Question 2

what is the efficient number of firms?

Answer 2

the more firms, the more competition, the more welfare
- not true with entry costs and increasing returns to scale

tradeoff when increasing the number of firms
- more firms reduce price and increase consumer surplus
- more firms imply more entry costs and higher average costs

efficient outcome would have one firm selling at marginal cost which is unattainable

Question 3

entry and competition - Bresnahan and Reiss, 1991

Answer 3

trying to understand how competition shapes profits

using variation in market size to study how the number of firms affects outcomes