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Market size matters

Author

Listed:
  • Jeffrey R. Campbell
  • Hugo A. Hopenhayn

Abstract

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.

Suggested Citation

  • Jeffrey R. Campbell & Hugo A. Hopenhayn, 2003. "Market size matters," Working Paper Series WP-03-12, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-03-12
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    References listed on IDEAS

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    More about this item

    Keywords

    Markets ; Retail trade ; Metropolitan areas - Statistics;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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