GROWTH, COMPETITION AND WELFARE

The impact of competition on growth and welfare is analysed by develop ing a model in which the number of firms, profit margins and innovatio n rates are endogenous. Different regimes of oligopolistic competition are distinguished. The tougher the price competition, the lower the p rofit margins for a given rate of concentration. This reduces the numb er of firms and product variety in a free entry equilibrium. Consequen tly, tougher competition implies larger firm size and higher rates of innovation since new technologies can be applied in a larger market. O ligopolistic pricing leads to underinvestment in firm-specific knowled ge, even if inter-firm knowledge spillovers are neglected.