Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/312854 
Year of Publication: 
2022
Citation: 
[Journal:] Review of Economic Design [ISSN:] 1434-4750 [Volume:] 27 [Issue:] 3 [Publisher:] Springer [Place:] Berlin, Heidelberg [Year:] 2022 [Pages:] 603-634
Publisher: 
Springer, Berlin, Heidelberg
Abstract: 
This paper provides a novel rationale for the regulation of market size when heterogeneous firms compete. A regulator seeks to maximize total welfare by choosing the number of firms allowed to enter the market, e.g. by issuing a certain number of licenses. Opening up the market for more firms has a two-fold effect: it increases competition and thus welfare, but at the same time, it also attracts more cost-intensive firms, driving down average production efficiency. The regulator hence faces a trade-off between raising beneficial competition and detrimental costs. If goods are sufficiently substitutable, the latter effect can outweigh the former. It is then optimal to restrict the market size, rationalizing a limit to competition. This possibility result holds even in the absence of entry costs, search costs or increasing returns to scale, which previous literature required.
Subjects: 
Regulation
Imperfect competition
Oligopolies
JEL: 
D43
L13
L51
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Document Version: 
Published Version

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