The Effect of Regulation on a Dominant Firm to Protect Fringe Firms in a Local Market

A model of competition between a large-scale dominant firm and fringe firms is analyzed to examine the effect of market share regulation on the dominant firm to protect the small firms. One feature of the model is that the dominant firm and the small firms provide close but different services to consumers. Because business stealing effects are possible for both the dominant firm’s and small firms’ entries, the effect on social welfare is generally indefinite. When small firms face the danger of extinction because of the expansion of the dominant firm, it is demonstrated that the effect is evaluated solely by the excessiveness of the number of small firms. As small firms tend to enter excessively when there is spatial competition, the market share regulation on the dominant firm prevents efficient outcome unless small firms are eliminated. In most regional retail markets in Japan, small ordinary stores are far from total elimination, so a restriction on the expansion of large-scale stores is not needed.