Business stealing efffect. On equilibrium and optimum number of firms in endogeneous oligopoly

Abstract

Purpose: the paper is devoted to comparing the equilibrium and socially efficient number of firms in the free entry oligopoly, including the identification of formal conditions under which the restriction of excessive competition leads to an increase in social welfare and its fall. Discussion: the equilibrium number of firms in endogenous oligopoly can be found from the zero profit condition. As was proved before, under obvious, at first sight, assumptions the equilibrium number of firms is excessive. The reason is the so called business stealing effect, according to which new entrants make incumbent firms decrease production. Results: аuthors show that, contrary to the common belief, business stealing effect doesn’t work for many used in practice specifications of the model, in particular for the constant elasticity demand. It means the opposite conclusions and necessity for government to stimulate new firms to enter the markets due to reasons different from product heterogeneity and coopetition. The integerity problem and its negative effects is also investigated.