Firm Size Inequality and Market Power
AbstractIn this paper, we reexamine the relationship between performance and concentration in the light of modern oligopoly theory. More specifically, we examine the link that exists between firm size inequality (FSI) and market power. Traditional theory predicts that market power should be higher in markets where FSI is high. Using a model with capacity constraints and endogenous conduct, we show that the market power-FSI relationship is in fact more complex. We show that two effects are at play leading to a U-shaped relationship between market power and FSI. Another implication of this model is that prices should be more unstable in markets where firms are asymmetric in size. In the second part of this paper, we test these predictions on data for the U.S. airline industry. We estimate a fare equation for a panel of 400 routes. We first show that using traditional measures of market concentration such as the Herfindahl is restrictive. We then show that there is indeed a U- shaped relationship between FSI and Prices holding costs constant and that prices are more unstable in markets where FSI is high.
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Bibliographic InfoPaper provided by Université Laval - Département d'économique in its series Cahiers de recherche with number 9714.
Date of creation: 1997
Date of revision:
Oligopoly and Other Imperfect Markets; Air Transportation;
Other versions of this item:
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation
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