A Note on the Adverse Effect of Competition on Consumers

• Date: 01 February 2014
• DOI: http://doi.org/10.1111/jpet.12044
• Author: SOUMYANANDA DINDA,ARIJIT MUKHERJEE
• Published date: 01 February 2014

ANOTE ON THE ADVERSE EFFECT OF COMPETITION ON

CONSUMERS

SOUMYANANDA DINDA

Sidho Kanho Birsha University

ARIJIT MUKHERJEE

Loughborough University and CESifo

Abstract

It is usually believed that higher competition, implying

more active firms, benefits consumers. We show that this

may not be the case in an industry with asymmetric cost

firms. A rise in the number of more cost-inefficient firms

makes the consumers worse off in the presence of a welfare-

maximizing tax/subsidy policy. A rise in the number of

more cost-inefficient firms also reduces social welfare.

1. Introduction

It is usually believed that higher product market competition reduces price

and benefits the consumers (Metzenbaum 1993, Hausman and Leibtag

2007). However, the evidence does not support this view always. Caves,

Whinston, and Hurwitz (1991), Grabowski and Vernon (1992), and Perloff,

Suslow, and Seguin (2006) show that entry triggers price in the U.S. pharma-

ceutical industry. Using simulations, Thomadsen (2007) shows that price in

the fast food industry may be higher under duopoly than under monopoly.

We provide an explanation for the price raising effect of higher competi-

tion. Considering an industry with asymmetric cost firms, we show that a rise

in the number of more cost-inefficient firms makes the consumers worse off

Arijit Mukherjee, School of Business and Economics, Sir Richard Morris Build-

ing, Loughborough University, Loughborough, Leicestershire, LE11 3TU, UK

(A.Mukherjee@lboro.ac.uk). Soumyananda Dinda, Department of Economics, Sidho

Kanho Birsha University, Purulia, WestBengal, 723101, India (sdinda2000@yahoo.co.in).

We thank an associate editor, two anonymous referees, and Tarun Kabiraj for helpful

comments and suggestions. The usual disclaimer applies.

Received December 14, 2010; Accepted October 5, 2011.

C2013 Wiley Periodicals, Inc.

Journal of Public Economic Theory, 16 (1), 2014, pp. 157–163.

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