Non-Existence of Free-Entry Cournot Equilibrium: The Importance of Market Size and Technology Choice

We examine the long-run outcomes under free entry-exit when each firm not only takes account of the effects of her own entry-exit on the market structure but also takes full account of the effects due to other firms' simultaneous entry-exit. Adopting the framework of the theory of social situations (TOSS), we derive a unique set of stable outcomes, which is based only on two fundamental assumptions of the "firms-as-profit-maximizers" and the "free entry-exit," but not on any specific mode of play (i.e., a specification of how the players make their decisions, take actions within the market, and think of the other players' behavior). We compare the stable outcome with the long-run equilibria under the competitive mode, the Cournot-Nash mode, and the monopolistically competitive mode. We find that (i) each of these equilibria can be compatible with the stable outcome only if the market size is small and (ii) none of them can be compatible with the stable outcome if the market size is sufficiently large; Further, (iii), for almost all market size, the monopolistically competitive equilibrium is compatible with the stable outcome if the elasticity of substitution is sufficiently close to (but, greater than) unity. In a sense, when the market size is sufficiently large, these three modes of play are not consistent with two fundamental assumptions.

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Market Size, Technology Choice, and Market Structure

German Economic Review ◽

10.1111/1468-0475.00050 ◽

2002 ◽

Vol 3 (1) ◽

pp. 25-41 ◽

Cited By ~ 7

Author(s):

Walter Elberfeld ◽

Georg Götz

Keyword(s):

Market Structure ◽

Large Scale ◽

Monopolistic Competition ◽

Product Variety ◽

Market Size ◽

Technology Choice ◽

Structural Effects ◽

Aggregate Output ◽

Number Of Firms

Abstract We introduce technology choice into a model of monopolistic competition and analyze the structural effects of changes in market size. A larger market leads to the adoption of a large-scale technology. If a technology switch occurs, the number of firms decreases, and a rationalizing effect arises: individual and aggregate output increases; prices fall. This need not benefit consumers since a technology switch is associated with a decrease in product variety.

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