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Firm Size Inequality and Market Power

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  • Barla, Philippe

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Abstract

In 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 Info

Paper provided by Université Laval - Département d'économique in its series Cahiers de recherche with number 9714.

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Date of creation: 1997
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Handle: RePEc:lvl:laeccr:9714

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Keywords: Oligopoly and Other Imperfect Markets; Air Transportation;

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  1. Davidson, Carl & Deneckere, Raymond J, 1990. "Excess Capacity and Collusion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 521-41, August.
  2. Severin Borenstein, 1992. "The Evolution of U.S. Airline Competition," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 45-73, Spring.
  3. Levitan, Richard & Shubik, Martin, 1972. "Price Duopoly and Capacity Constraints," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(1), pages 111-22, February.
  4. Schmalensee, Richard., 1987. "Inter-industry studies of structure and performance," Working papers 1874-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  5. Berry, Steven T, 1990. "Airport Presence as Product Differentiation," American Economic Review, American Economic Association, vol. 80(2), pages 394-99, May.
  6. Encaoua, David & Jacquemin, Alexis, 1980. "Degree of Monopoly, Indices of Concentration and Threat of Entry," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 87-105, February.
  7. Barla, P., 1996. "Rivalry in the U.S. Airline Industry," Papers 9603, Laval - Recherche en Politique Economique.
  8. Koo, Anthony Y. C. & Martin, Stephen, 1984. "Market structure and U.S. trade flows," International Journal of Industrial Organization, Elsevier, vol. 2(3), pages 173-197, September.
  9. Evans, William N & Kessides, Ioannis N, 1993. "Localized Market Power in the U.S. Airline Industry," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 66-75, February.
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Cited by:
  1. Carlsson, Fredrik, 2002. "Price and Frequency Choice under Monopoly and Competition in Aviation Markets," Working Papers in Economics 71, University of Gothenburg, Department of Economics.
  2. Soo Jeoung Sohn, 2006. "Choosing the partners in the licensing alliance," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 251-260.
  3. Johan F.M. Swinnen & Anneleen Vandeplas, 2010. "Market power and rents in global supply chains," Agricultural Economics, International Association of Agricultural Economists, vol. 41(s1), pages 109-120, November.
  4. Foros, Øystein & Steen, Frode, 2009. "Gasoline prices jump up on Mondays: An outcome of aggressive competition?," Discussion Papers 2009/2, Department of Business and Management Science, Norwegian School of Economics.
  5. Paolo Coccorese & Alfonso Pellecchia, 2009. "Multimarket Contact and Profitability in Banking: Evidence from Italy," Journal of Financial Services Research, Springer, vol. 35(3), pages 245-271, June.
  6. Winther, K. Tobias, 2008. "Analyzing new profit opportunities: a guide to making business projects financially successful," MPRA Paper 11346, University Library of Munich, Germany.
  7. Roberta Longo & Marisa Miraldo & Andrew Street, 2008. "Price regulation of pluralistic markets subject to provider collusion," Working Papers 045cherp, Centre for Health Economics, University of York.
  8. Federico Boffa & Carlo Scarpa, 2009. "An Anticompetitive Effect of Eliminating Transport Barriers in Network Markets," Review of Industrial Organization, Springer, vol. 34(2), pages 115-133, March.
  9. Hagedoorn, John & Lorenz-Orlean, Stefanie & Kranenburg, Hans, 2007. "Inter-firm technology transfer: Partnership-embedded licensing or standard licensing agreements?," MERIT Working Papers 006, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  10. Guo, Jinzhong & Xu, Qi & Chen, Qinghua & Wang, Yougui, 2013. "Firm size distribution and mobility of the top 500 firms in China, the United States and the world," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(13), pages 2903-2914.
  11. Steven Pilloff & Stephen Rhoades, 2002. "Structure and Profitability in Banking Markets," Review of Industrial Organization, Springer, vol. 20(1), pages 81-98, February.
  12. Mulder, Machiel & Haan, Marco A. & Dijkstra, Peter T., 2014. "Industry structure and collusion with uniform yardstick competition: theory and experiments," Research Report 14010-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  13. Eckert, Andrew, 2003. "Retail price cycles and the presence of small firms," International Journal of Industrial Organization, Elsevier, vol. 21(2), pages 151-170, February.
  14. Gunther Tichy, 2001. "What Do We Know about Success and Failure of Mergers?," Journal of Industry, Competition and Trade, Springer, vol. 1(4), pages 347-394, December.

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