Competition in Large Markets

39 Pages Posted: 13 Dec 2005

See all articles by Jeffrey R. Campbell

Jeffrey R. Campbell

University of Notre Dame; Tilburg University

Multiple version iconThere are 2 versions of this paper

Date Written: November 2005

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.

Keywords: Monopolistic Competition, Market Size, Free Entry, Exit, Nonparametric Test

JEL Classification: L11, L81

Suggested Citation

Campbell, Jeffrey R., Competition in Large Markets (November 2005). FRB of Chicago Working Paper No. 2005-16, Available at SSRN: https://ssrn.com/abstract=869441 or http://dx.doi.org/10.2139/ssrn.869441

Jeffrey R. Campbell (Contact Author)

University of Notre Dame ( email )

United States

Tilburg University ( email )

Tilburg, 5000 LE
Netherlands

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