The Optimal Number of Firms With an Application to Professional Sports Leagues

This article analyzes a cartel’s optimal choice of the number of firms in Salop’s circular city model under different assumptions about cooperative behaviors among firms. The authors consider two scenarios: (a) a cartel operates under a fully collusive regime in which it controls the number of firms and their pricing, and (b) a cartel operates under a semi-collusive regime in which it controls only the number of firms and pricing is left to individual firms. The authors compare the outcomes in both scenarios to the socially optimal and free entry outcomes. They then apply these comparisons to the case of a professional sports league’s optimal choice of the number of franchises.