Thick Markets, Product Variety, and Price Markups: A Case Study
Posted: 9 Sep 1996
Date Written: Undated
By focusing on the market of books in Ann Arbor, Michigan, the implications of thick markets on product variety, market competition amd price markups are empirically tested. It is shown that there exists some relation between market thickness, product variety, and price markups bookstores are charging for the book titles they carry. In addition, it appears that those relations are much stronger for the most popular books of the sample, especially for the New York Times (NYT) and the Ann Arbor News (AAN) bestsellers. On average, book titles are discounted by 6% of their suggested retail price. The NYT bestsellers are discounted by 5.81% more than the rest of the titles, while the AAN bestsellers by 9.58% more. A 10% increase in countrywide sales of a book title results into a 3.2% increase in the number of stores (market substitutes) carrying this title. For the entire sample, price markups drop by 0.14% in response to a 10% increase in the number of market substitutes. Moreover, for the NYT bestsellers sub-sample, price markups drop by 0.94%, while for the AAN bestsellers one price markups drop by 1.2% in response to the same increase in the number of market substitutes. Finally, for the NYT bestsellers carried by more than 7 stores (out of 17 stores in the sample), price markups drop by 3.1% in response to a 10% increase in market substitutes. Market thickness seems to support a larger number of market substitutes and lower price markups, especially for highly demanded products.
JEL Classification: E31
Suggested Citation: Suggested Citation