Number of Firms and Price Competition

Very preliminary. Please do not cite or quote Does price competition become more intense as the number of firms increases? In this paper, we reconsider the striking result in the Varian’s (1980) model: an increase in the number of firms may lead to less competitive pricing and may be socially detrimental. We show that, if producers have heterogeneous cost types and have private information about their cost types, then there exist circumstances under which an increase in the number of firms causes a force toward less competitive pricing and yet is beneficial to consumers on average and promotes social welfare. We also show that the striking results in the Varian’s model correspond to the findings in the special case where the support of possible cost typesissufficiently narrow.