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Excessive Entry in Industrial Markets: Mankiw-Whinston Revisited with Heterogeneous Firms and Collusion

ABSTRACT The article considers the impact of the market concentration on the social welfare. An earlier result about excessive number of firms at a free-entry oligopoly is generalized to the more realistic case of heterogeneous firms. A possible change in firms’ behavior, including collusion, which is more probable under entry restriction, is also analyzed. It is shown that collusion is less dangerous than multiplied fixed costs if the ratio of the choke price and marginal costs does not exceed a certain critical value related to a share of the fixed costs.