Market Structure, Scale Economies and Industry Performance

We provide an extensive and general investigation of the e¤ects on industry performance – pro…ts, social welfare and price-cost margins –of exogenously changing the number of …rms in Cournot markets. This includes an in-depth exploration of the well-known trade-o¤ between competition and production e¢ ciency. Most conventional beliefs actually require some quali…cations to be valid. Under scale economies, welfare is maximized by a …nite number of …rms. Our results shed light on several policy debates in industrial organization, including the relationship between the Her…ndahl index and social welfare, destructive competition and natural monopoly. Our analytical approach combines simplicity with generality. Key words and phrases: Cournot oligopoly, decreasing marginal cost, equilibrium comparative statics. JEL codes: D43, D60, L13, L40. The author is grateful to Val Lambson for several helpful conversations on the topic of this paper. This work has also bene…tted from comments from Stephen Martin, William Novshek, John Roberts, Jean Tirole, as well as feedback from seminar audiences at CORE, WZB-Berlin, and the Universities of Aarhus, Arizona, Bergen, Caltech, U.L.Brussels, Essex, Cergy-Pontoise, Copenhagen, Helsinki, Manchester, Odense, Paris I, Strasbourg, Vanderbilt, Vienna and Stony-Brook. yDepartment of Economics, University of Arizona, Tucson, AZ 85721 (E-mail: [email protected])