Ruhr Economic Papers

Ruhr Economic Papers #33

A Note on the Excess Entry Theorem in Spatial Models with Elastic Demand

by Yiquan Gu and Tobias Wenzel

RWI, 12/2007, 18 S./p., 8 Euro, ISBN 978-3-86788-030-5

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Abstract

This paper revisits the excess entry theorem in spatial models à la Vickrey (1964) and Salop (1979) while relaxing the assumption of inelastic demand. Using a demand function with a constant demand elasticity, we show that the number of firms that enter a market decreases with the degree of demand elasticity.We find that the excess entry theorem does only hold when demand is sufficiently inelastic. Otherwise, there is insufficient entry. In the limiting case of unit elastic demand, the market is monopolized. We point out when and how a public policy can be desirable and broaden our results with a more general transportation cost function.

JEL-Classification: L11, L13

Keywords: Elastic demand; spatial models; excess entry theorem

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