On competition and endogenous firm efficiency

Conventional wisdom holds that product market competition disciplines firms into efficiency of operation. However, in a well known paper, Martin (1993 ) has shown that in a linear Cournot setting (with costs determined first a nd product market competition taking place in a second stage) the exact opp osite obtains - a larger number of firms competing in the market implies lo wer firm efficiency. The note clarifies further the links between market st ructure and efficiency. Specifically, it argues why (and how) the result de rived by Martin (1993) depends upon the assumptions made regarding the stru cture of demand and nature of conjectures held by firms as to their rivals' behavior. An illustrative counter-example (with Bertrand behavior and non- linear demand) in which entry increases efficiency is provided as well.