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Price markups in oligopoly models with differentiated products

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Author Info
Clarissa Yeap () (University of Minnesota)
Abstract

I show that the relationship between the toughness of price competition and market size in oligopoly models depends on assumptions about the shape of preferences. In a Perloff and Salop model of nonlocalized taste for variety, price-cost margins remain bounded above zero as market size grows infinitely large, even as the number of firms grows without bound. By contrast, a Salop circle model of localized preferences generates price-cost margins that fall to zero as market size grows large. The toughness of price competition never reaches competitive levels if nonlocalized preferences generate entry opportunities that expand the set of product variants. The toughness of price competition rises to competitive levels if localized preferences generate entry opportunities to "fill in" product space. I also outline an empirical test for boundedness of price-cost margins by examining boundedness of firm revenues in chain and non-chain restaurants in Census of Retail Trade data.

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File URL: http://economicsbulletin.vanderbilt.edu/2008/volume12/EB-08L10003A.pdf
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Article provided by Economics Bulletin in its journal Economics Bulletin.

Volume (Year): 12 (2008)
Issue (Month): 15 ()
Pages: 1-10
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:ebl:ecbull:v:12:y:2008:i:15:p:1-10

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L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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  2. Sattinger, Michael, 1984. "Value of an Additional Firm in Monopolistic Competition," Review of Economic Studies, Blackwell Publishing, vol. 51(2), pages 321-32, April. [Downloadable!] (restricted)
  3. Bresnahan, Timothy F & Reiss, Peter C, 1990. "Entry in Monopoly Markets," Review of Economic Studies, Blackwell Publishing, vol. 57(4), pages 531-53, October. [Downloadable!] (restricted)
  4. Timothy F. Bresnahan & Peter C. Reiss, 1987. "Do Entry Conditions Vary across Markets?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(1987-3), pages 833-882. [Downloadable!]
  5. Katja Seim Author-Email: kseim@wharton.upenn.edu Author-Workplace-Name: University of Pennsylvania, 2006. "An Empirical Model of Firm Entry with Endogenous Product-type Choices," RAND Journal of Economics, The RAND Corporation, vol. 37(3), pages 619-640, Autumn.
  6. Michael J. Mazzeo, 2002. "Product Choice and Oligopoly Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 221-242, Summer.
  7. Perloff, Jeffrey M & Salop, Steven C, 1985. "Equilibrium with Product Differentiation," Review of Economic Studies, Blackwell Publishing, vol. 52(1), pages 107-20, January. [Downloadable!] (restricted)
  8. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Blackwell Publishing, vol. 43(2), pages 217-35, June. [Downloadable!] (restricted)
  9. Xavier Gabaix & David Laibson & Hongyi Li, 2005. "Extreme Value Theory and the Effects of Competition on Profits," Levine's Bibliography 784828000000000656, UCLA Department of Economics. [Downloadable!]
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  11. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June. [Downloadable!] (restricted)
    Other versions:
  12. Shaked, Avner & Sutton, John, 1987. "Product Differentiation and Industrial Structure," Journal of Industrial Economics, Blackwell Publishing, vol. 36(2), pages 131-46, December. [Downloadable!] (restricted)
  13. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Blackwell Publishing, vol. 49(1), pages 3-13, January. [Downloadable!] (restricted)
  14. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October. [Downloadable!] (restricted)
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  15. Steven Berry & Joel Waldfogel, 2003. "Product Quality and Market Size," NBER Working Papers 9675, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  16. Steven T. Berry & Joel Waldfogel, 2001. "Do Mergers Increase Product Variety? Evidence From Radio Broadcasting," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 1009-1025, August. [Downloadable!] (restricted)
  17. Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, vol. 51(5), pages 1469-83, September. [Downloadable!] (restricted)
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