Flexible Manufacturing, Entry, and Competition Policy

Abstract

This paper studies a model of product variety with flexible manufacturers when, contrary to prior work, atomistic entry occurs prior to horizontal integration. In this model, more lax antitrust laws that allow for fewer and more concentrated merged firms lead to a greater extent of excess entry. Optimal policy permits no horizontal mergers when demand is perfectly inelastic, but may permit some horizontal integration when demand is price responsive. The order of entry is shown to play an important role in determining the effect of flexible (vs. inflexible) manufacturing on economic welfare.