Consumer entry, competition and industrial policy, and the Biggar DWL

• Department of Economics

This event features a discussion by Simon Loertscher (University of Melbourne).

If consumers with heterogeneous entry costs enter a market before the firms choose their quantities or prices, then the mass of consumers in the market increases in the per-consumer surplus generated by that market. For a Hotelling duopoly model with quadratic transportation costs, maximum differentiation vanishes when consumer entry is moderately sensitive to expected consumer surplus. As the elasticity of consumer entry to consumer surplus goes to infinity, the equilibrium placements of the two firms converge to the mid point. Applying worker entry to a Salop model provides a parsimonious and coherent explanation for the divergent developments across regions such as between the Silicon Valley and Massachusetts Route 128. We also establish a general inefficient free entry result when both firm and consumers enter: either too many firms and consumers enter, or too few, compared to the first best. This is particularly remarkable for Cournot, where for a given mass of consumers firm entry is excessive, and for a given number of firms, consumer entry is deficient. We also show that the resulting deadweight loss of monopoly relative to the standard deadweight loss is unbounded. The framework offers new scope for competition and industrial policy to affect economic development.

Co-author: Bing Liu.