Introduction

Oligopolistic firms restrict their production and earn excess profits. Since an increase in competition is considered to raise each oligopolist's production and make it closer to the first-best level, it is commonly believed that increasing competition among firms raises national welfare. With this theoretical underpinning, antitrust policies are generally designed so that new entries are encouraged and entry barriers are strictly prohibited.

Recently, however, it has been found in the theoretical literature on industrial organization that more competition may well reduce welfare in various contexts. For example, Spence (1984), Stiglitz (1981) and Tandon (1984), while analysing R&D decisions under oligopolistic situations, have pointed out the possibility of welfare loss caused by the existence of potential entrants or by free-entry of identical rival firms. Schmalensee (1976), Suzumura and Kiyono (1987) and von Weizsäcker (1980a, b) found that in a Cournot oligopolistic sector the optimal number of (identical) firms may well be smaller than the equilibrium number of firms with free entry and exit. In these models, the existence of fixed costs (or increasing returns to scale) plays a crucial role in deriving diseconomies of competition. While a new entry raises consumers' surplus, it requires an additional fixed cost. It is shown that the latter cost may well exceed the former benefits.

In this chapter we focus on an asymmetric oligopolistic industry with a fixed number of firms. An uneven technical level amongst firms provides the key ingredient.