Competition among Large and Heterogeneous Small Firms

TL;DR

This paper extends a model of large and small firms by incorporating cost heterogeneity among small firms, revealing that trade liberalization can either increase or decrease small firm presence depending on market conditions.

Contribution

It introduces a new necessary and sufficient condition for mixed market structures with heterogeneous small firms, expanding previous models.

Findings

Trade liberalization effects depend on cost heterogeneity.

Heterogeneity can lead to increased or decreased small firm presence.

Provides a novel condition for market structure existence.

Abstract

We extend the model of Parenti (2018) on large and small firms by introducing cost heterogeneity among small firms. We propose a novel necessary and sufficient condition for the existence of such a mixed market structure. Furthermore, in contrast to Parenti (2018), we show that in the presence of cost heterogeneity among small firms, trade liberalization may raise or reduce the mass of small firms in operation.