Competition for Market Share and for Market Size

In this chapter, we build on the ideas developed in Chap. 1 to formulate a more general model, although portraying the simplified economy imagined by Dixit and Stiglitz, an economy reduced to two sectors, one oligopolistic, the other competitive, with firms selling each a single good to a representative consumer. In the following, we will first present the canonical model and then explore several extensions. Assuming either weak or homothetic separability, we define a general concept of oligopolistic equilibrium. The first-order conditions are used to derive a simple formula where the relative markup is a function of the intra- and intersectoral elasticities of substitution. This leads to a parameterisation of equilibria in terms of firms’ competitive toughnesses defining possible regimes of oligopolistic competition. It is then shown that such a formula is robust to supposing that firms take into account the income feedback effects of distributed income (the so-called Ford effects). In the homogeneous good case, we compare our approach to alternative ones, such as the conjectural variation and the supply function approaches. Finally, the methodology is applied to two policy questions: Is tougher competition price decreasing? Does it foster innovation?