Product differentiation, economies of scale and entry

Gu, Y. ORCID: https://orcid.org/0000-0002-4594-4852 and Wenzel, T. (2026) Product differentiation, economies of scale and entry. Economics Letters. 113049. ISSN 0165-1765 doi: 10.1016/j.econlet.2026.113049

Abstract/Summary

This paper extends the standard circular city model of spatial competition to incorporate economies of scale. We demonstrate that new market entry generates a negative externality by fragmenting demand and forcing existing firms to operate at a less efficient scale. This scale-fragmentation channel widens the wedge between private and social entry incentives, leading to an amplified excess-entry result. When firms can endogenously invest to lower their unit costs, market entry remains socially excessive.

Additional Information	Yiquan Gu gratefully acknowledges support from the British Academy through the Innovation Fellowships Scheme (IF24RBDS2\240112).
Item Type	Article
URI	https://centaur.reading.ac.uk/id/eprint/129850
Identification Number/DOI	10.1016/j.econlet.2026.113049
Refereed	Yes
Divisions	Henley Business School > Real Estate and Planning
Additional Information	Yiquan Gu gratefully acknowledges support from the British Academy through the Innovation Fellowships Scheme (IF24RBDS2\240112).
Publisher	Elsevier
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