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Sequential Supply Decision and Market Efficiency: Theory and Evidence

Author

Listed:
  • In Kyung Kim

    (Department of Economics, Nazarbayev University)

  • Yoon-Jin Lee

    (Department of Economics, Kansas State University)

  • Young-Ro Yoon

    (Department of Economics, Wayne State University)

Abstract

In a homogeneous goods market, due to the lack of the preemption effect, each firm�s demand is likely to be proportional to its share of total output. Firms are inclined to supply more to increase their market shares, but should also consider the potential cost from excess supply. Thus, firms should make strategic decisions on how much to supply. We study this topic by considering an oligopoly market in which firms make decisions sequentially under a fixed price. We first provide a theoretical model and find the conditions under which either an efficient supply or oversupply occurs. Our model proposes two practical ways to evaluate the efficiency of a market, specifically regarding excess supply, that do not require information about market demand. Using these, we evaluate the efficiency of the Korean movie theater industry. Our empirical findings indicate oversupply of seating capacity in that industry.

Suggested Citation

  • In Kyung Kim & Yoon-Jin Lee & Young-Ro Yoon, 2017. "Sequential Supply Decision and Market Efficiency: Theory and Evidence," Working Papers 1703, Nazarbayev University, Department of Economics, revised Mar 2017.
    • Handle: RePEc:naz:wpaper:1703
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    References listed on IDEAS

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    More about this item

    Keywords

    oversupply; first mover advantage; market efficiency; movie theater industry;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media

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