Social Inefficiency of Free Entry Under the Product Diversity

Abstract

The paper addressed to a question whether the free entry of profit-seeking large firms (oligopolies) is advantageous for consumers, or the governmental restrictions to enter may have the positive effect on consumers’ well-being. The negative welfare effect of excessive enter is well-known in case of homogeneous good, though there was hypothesis that consumers’ love for variety in case of differentiated good may offset this effect. The main result of this paper is that this almost never happened. We study a general equilibrium model with imperfect Bertrand-type price competition. Firms assumed to have non-zero impact to market statistics, in particular, to consumer’s income via distribution of non-zero profit across consumers-shareholders. It is proved that the governmental restrictions in certain bounds increases Social welfare under quite natural assumptions on utilities, which hold for most of the commonly used classes of utility functions, such as Quadratic, CARA, HARA, CES, etc.KeywordsBertrand competitionAdditive preferencesFord effectExcessive enterConsumer’s welfare