This paper empirically examines the effects of market size on producers' sizes in retail trade industries with many producers. A robust prediction of oligopoly theory is that larger markets are more competitive and have lower price-cost markups. Because producers in more competitive markets must sell more at a lower markup to recover their fixed costs, oligopoly theory implies that larger and more competitive markets have larger producers. Our estimated market size effects indicate whether or not this prediction of oligopoly theory carries over to competition among many producers. ; Our analysis uses observations from thirteen retail trade industries across 225 metropolitan statistical areas. In most of the industries we examine, producers are larger in larger markets, even after controlling for differences between markets' demographic and factor prices. This is the case whether we measure producers' sizes with their average sales or average employment. Thus, our results indicate that increasing the number of competitors decreases markups for most of the industries we examine.
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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number
WP-03-12.
Jeffrey R. Campbell & Hugo A. Hopenhayn, 2002.
"Market Size Matters,"
NBER Working Papers
9113, National Bureau of Economic Research, Inc.
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Kyle Bagwell & Garey Ramey, 1995.
"Coordination Economies,"
Discussion Papers
1148, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Kyle Bagwell & Garey Ramey, 1992.
"Coordination Economies,"
Discussion Papers
1034, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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