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Competition in Large Markets

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  • Jeffrey R. Campbell

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11847.

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Date of creation: Dec 2005
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Handle: RePEc:nbr:nberwo:11847

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  1. Chad Syverson, 2001. "Market Structure and Productivity: A Concrete Example," Working Papers 01-06, Center for Economic Studies, U.S. Census Bureau.
  2. Jeffrey R. Campbell & Hugo Hopenhayn, 2003. "Market size matters," Working Paper Series WP-03-12, Federal Reserve Bank of Chicago.
  3. Jaap H. Abbring & Jeffrey R. Campbell, 2004. "Creative destruction in local markets," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 50-60.
  4. 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.
  5. Jeffrey R. Campbell, 1997. "Computational Appendix to Entry, Exit, Embodied Technology, and Business Cycles," Technical Appendices campbell98, Review of Economic Dynamics.
  6. Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1988. "Patterns of Firm Entry and Exit in U.S. Manufacturing Industries," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 495-515, Winter.
  7. Raymond Deneckere & Michael Rothschild, 1986. "Monopolistic Competition and Preference Diversity," Discussion Papers 684, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Berry, Steven & Waldfogel, Joel, 2005. "Product Quality and Market Size," Working Papers 1, Yale University, Department of Economics.
  9. Jeffrey R. Campbell, 1997. "Entry, Exit, Embodied Technology, and Business Cycles," NBER Working Papers 5955, National Bureau of Economic Research, Inc.
  10. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 217-35, June.
  11. Wolinsky, Asher, 1986. "True Monopolistic Competition as a Result of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 493-511, August.
  12. Powell, James L & Stock, James H & Stoker, Thomas M, 1989. "Semiparametric Estimation of Index Coefficients," Econometrica, Econometric Society, vol. 57(6), pages 1403-30, November.
  13. Hart, Oliver D, 1985. "Monopolistic Competition in the Spirit of Chamberlin: A General Model," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 529-46, October.
  14. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, December.
  15. Bresnahan, Timothy F & Reiss, Peter C, 1990. "Entry in Monopoly Markets," Review of Economic Studies, Wiley Blackwell, vol. 57(4), pages 531-53, October.
  16. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
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Cited by:
  1. Clarissa Yeap, 2006. "The Production Decisions of Large Competitors: Detecting Cost Advantages and Strategic Behavior in Restaurants," Working Papers 06-19, Center for Economic Studies, U.S. Census Bureau.
  2. Jaap H. Abbring & Jeffrey R. Campbell, 2006. "Oligopoly dynamics with barriers to entry," Working Paper Series WP-06-29, Federal Reserve Bank of Chicago.

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