Firm Size Inequality and Market Power
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.
|Date of creation:||1997|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (418) 656-5122
Fax: (418) 656-2707
Web page: http://www.ecn.ulaval.ca
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jan K. Brueckner & Nichola J. Dyer & Pablo T. Spiller, 1992. "Fare Determination in Airline Hub-and-Spoke Networks," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 309-333, Autumn.
- Barla, Philippe, 1996.
"Rivalry in the U.S. Airline Industry,"
Cahiers de recherche
9603, Université Laval - Département d'économique.
- Richard E. Levitan & Martin Shubik, 1970.
"Price Duopoly and Capacity Constraints,"
Cowles Foundation Discussion Papers
287, Cowles Foundation for Research in Economics, Yale University.
- Borenstein, S., 1991.
"The Evolution of U.S. Airline Competition,"
389, California Davis - Institute of Governmental Affairs.
- 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.
- 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.
- Carl Davidson & Raymond Deneckere, 1984.
"Excess Capacity and Collusion,"
675, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Berry, Steven T, 1990. "Airport Presence as Product Differentiation," American Economic Review, American Economic Association, vol. 80(2), pages 394-99, May.
- Schmalensee, Richard, 1989.
"Inter-industry studies of structure and performance,"
Handbook of Industrial Organization,
in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 16, pages 951-1009
- Schmalensee, Richard., 1987. "Inter-industry studies of structure and performance," Working papers 1874-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Severin Borenstein, 1989. "Hubs and High Fares: Dominance and Market Power in the U.S. Airline Industry," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 344-365, Autumn.
- David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
- 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.
- Brander, James A. & Zhang, Anming, 1993. "Dynamic oligopoly behaviour in the airline industry," International Journal of Industrial Organization, Elsevier, vol. 11(3), pages 407-435, September.
- Douglas W. Caves & Laurits R. Christensen & Michael W. Tretheway, 1984. "Economies of Density versus Economies of Scale: Why Trunk and Local Service Airline Costs Differ," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 471-489, Winter.
When requesting a correction, please mention this item's handle: RePEc:lvl:laeccr:9714. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Johanne Perron)
If references are entirely missing, you can add them using this form.