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Competition in Large Markets

Author

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  • Jeffrey R. Campbell

    () (Economic Research Federal Reserve Bank of Chicago)

Abstract

This paper develops a simple and robust implication of free entry followed by competition without substantial strategic interactions: Increasing the number of consumers leaves the distributions of producers' prices and other choices unchanged. In many models featuring non-trivial strategic considerations, producers' prices fall as their numbers increase. Hence, examining the relationship between market size and producers' actions provides a nonparametric tool for empirically discriminating between these distinct approaches to competition. To illustrate its application, I examine observations of restaurants' seating capacities, exit decisions, and prices from 224 U.S. cities. Given factor prices and demographic variables, increasing a city's size increases restaurants' capacities, decreases their exit rate, and decreases their prices. These results suggest that strategic considerations lie at the heart of restaurant pricing and turnover.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Jeffrey R. Campbell, 2005. "Competition in Large Markets," 2005 Meeting Papers 356, Society for Economic Dynamics.
    • Handle: RePEc:red:sed005:356
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    References listed on IDEAS

    as
    1. Michael Spence, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Oxford University Press, vol. 43(2), pages 217-235.
    2. Asher Wolinsky, 1986. "True Monopolistic Competition as a Result of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 493-511.
    3. Jeffrey Campbell, 1998. "Entry, Exit, Embodied Technology, and Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 371-408, April.
    4. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    5. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
    6. Chad Syverson, 2004. "Market Structure and Productivity: A Concrete Example," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1181-1222, December.
    7. Oliver D. Hart, 1985. "Monopolistic Competition in the Spirit of Chamberlin: A General Model," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 529-546.
    8. Timothy F. Bresnahan & Peter C. Reiss, 1990. "Entry in Monopoly Market," Review of Economic Studies, Oxford University Press, vol. 57(4), pages 531-553.
    9. Raymond Deneckere & Michael Rothschild, 1992. "Monopolistic Competition and Preference Diversity," Review of Economic Studies, Oxford University Press, vol. 59(2), pages 361-373.
    10. Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1988. "Patterns of Firm Entry and Exit in U.S. Manufacturing Industries," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 495-515, Winter.
    11. Steven Berry & Joel Waldfogel, 2003. "Product Quality and Market Size," NBER Working Papers 9675, National Bureau of Economic Research, Inc.
    12. Powell, James L & Stock, James H & Stoker, Thomas M, 1989. "Semiparametric Estimation of Index Coefficients," Econometrica, Econometric Society, vol. 57(6), pages 1403-1430, November.
    13. Jeffrey R. Campbell & Hugo A. Hopenhayn, 2005. "Market Size Matters," Journal of Industrial Economics, Wiley Blackwell, vol. 53(1), pages 1-25, March.
    14. Jaap H. Abbring & Jeffrey R. Campbell, 2004. "Creative destruction in local markets," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 50-60.
    15. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, January.
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    Cited by:

    1. Clarissa Yeap, 2006. "The Production Decisions of Large Competitors: Detecting Cost Advantages and Strategic Behavior in Restaurants," Working Papers 06-19, Center for Economic Studies, U.S. Census Bureau.
    2. Brekke, Kurt R. & Garcia Pires, Armando J. & Schindler, Dirk & Schjelderup, Guttorm, 2017. "Capital taxation and imperfect competition: ACE vs. CBIT," Journal of Public Economics, Elsevier, vol. 147(C), pages 1-15.
    3. Jaap H. Abbring & Jeffrey R. Campbell, 2006. "Oligopoly dynamics with barriers to entry," Working Paper Series WP-06-29, Federal Reserve Bank of Chicago.

    More about this item

    Keywords

    Competition; Market Size; Cross-Market Comparisions;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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