Equilibrium Number of Firms and Economic Welfare in a Spatial Price Discrimination Model

We examine the relationship between the equilibrium number of the firms entering the market and socially efficient one. Salop (1979) investigates a mill pricing model and shows that the former is larger than the latter (excess entry theorem). We find that, in contrast to Salop (1979), the equilibrium number of the firms can be either larger or smaller than the efficient one. If the entry cost is small and the resulting equilibrium number of the firms large, it is excessive from the normative viewpoint. On the contrary, if the entry cost is small and the resulting equilibrium number of the firms is large, it can be insufficient. JEL classification numbers: H42, L13