The Impact of Competition on Prices with Numerous Firms

Abstract

Many existing homogeneous-good markets exhibit large mark-ups, including some markets with many competing firms. We analyze simple monopolistic-competition models and show that idiosyncratic demand shocks driven by standard noise distributions can produce large equilibrium markups that are insensitive to the degree of competition. For example, with Gaussian noise and n firms, markups are proportional asymptotically to 1/p ln n; consequently, a hundred-fold increase in n, from 10 to 1000 competing firms, only halves the equilibrium markup. The elasticity of the markup with respect to n asymptotically equals the tail exponent from extreme value theory. Only noise distributions with extremely thin tails have negative asymptotic markup elasticities.