Competition among the big and the small

Armchair evidence shows that many industries are made of a few big commercial ormanufacturing firms, which are able to affect the market outcome, and of a myriad of smallfamily-run businesses with very few employees, each of which has a negligible impact on themarket. Examples can be found in apparel, catering, publishers and bookstores, retailing, financeand insurances, and IT industries. We provide a new general equilibrium framework thatencapsulates both market structures. Due to the higher toughness of the market, the entry of bigfirms leads them to sell more through a market expansion effect, which is generated by the exit ofsmall firms. Furthermore, the level of social welfare increases with the number of oligopolisticfirms because the procompetitive effect associated with the entry of a big firm dominates theresulting decrease in product variety....