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Firm Size Inequality and Market Power

  • Barla, Philippe

    ()

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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File URL: http://www.ecn.ulaval.ca/w3/recherche/cahiers/1997/9714.pdf
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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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  1. 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.
  2. Schmalensee, Richard., 1987. "Inter-industry studies of structure and performance," Working papers 1874-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Borenstein, S., 1991. "The Evolution of U.S. Airline Competition," Papers 389, California Davis - Institute of Governmental Affairs.
  4. 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.
  5. 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.
  6. 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.
  7. Barla, P., 1996. "Rivalry in the U.S. Airline Industry," Papers 9603, Laval - Recherche en Politique Economique.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. Berry, Steven T, 1990. "Airport Presence as Product Differentiation," American Economic Review, American Economic Association, vol. 80(2), pages 394-99, May.
  13. 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.
  14. 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.
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