Competition in Large Markets
39 Pages Posted: 13 Dec 2005
There are 2 versions of this paper
Competition in Large Markets
Competition in Large Markets
Date Written: November 2005
Abstract
This paper develops a simple and robust implication of free entry followed by competition without substantial strategic interactions: Increasing the number of consumers leaves the distributions of producers' prices and other choices unchanged. In many models featuring non-trivial strategic considerations, producers' prices fall as their numbers increase. Hence, examining the relationship between market size and producers' actions provides a nonparametric tool for empirically discriminating between these distinct approaches to competition. To illustrate its application, I examine observations of restaurants' seating capacities, exit decisions, and prices from 224 U.S. cities. Given factor prices and demographic variables, increasing a city's size increases restaurants' capacities, decreases their exit rate, and decreases their prices. These results suggest that strategic considerations lie at the heart of restaurant pricing and turnover.
Keywords: Monopolistic Competition, Market Size, Free Entry, Exit, Nonparametric Test
JEL Classification: L11, L81
Suggested Citation: Suggested Citation
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