Working Paper

Competition in large markets

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.

Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Working Paper Series

Publication Date: 2005

Number: WP-05-16