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Market size matters

  • Jeffrey R. Campbell
  • Hugo A. Hopenhayn

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.

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Date of creation: 2003
Date of revision:
Handle: RePEc:fip:fedhwp:wp-03-12
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  1. 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.
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  13. 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.
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