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Market Size, Firm Numbers and Market Share Asymmetry

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Abstract

This chapter deduces the nature of competition from an empirical analysis of firm numbers and market share asymmetry. Using a data set consisting of a cross-section sample of city pair markets, we extend the literature on market structure. In contrast to previous literature on empirical models of market structure and entry, here we study the determinants of size inequalities, which can reveal much about the competitive process that might be concealed when considering only the number of firms and a firm’s entry decision.

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Notes

  1. 1.

    Bresnahan and Reiss (1991), using ordered probit models, construct the novel concept of entry thresholds which relates the equilibrium number of firms to market size (measured by population); the estimated entry thresholds tell how much population is needed to support a given number of firms. Bresnahan and Reiss estimate also the entry threshold ratios which are ratios of per-firm market sizes; if this ratio is above one it means that entry increases competition. They find that the level of competition changes quickly as the number of firms increases, as well as most of competitive effect of entry is exhausted with the second or third entrant. Moreover, the literature has focused more explicitly on entry by solving the difficult problem of firm heterogeneity (Berry 1992 who used a simulated method of moments estimator proposed by McFadden (1989) and Pakes and Pollard (1989)). Other contributions extend the Bresnahan and Reiss’s (1991) framework in allowing different types of firms (e.g. Mazzeo (2002) endogenizes product choice decisions for motels of high and low quality in Western U.S.). In addition, Berry and Waldfogel (1999) estimate the social inefficiency caused by free entry in radio broadcasting.

  2. 2.

    See the large literature of stochastic models of firm’s growth; examples are Hart and Prais (1956), Simon and Bonini (1958), Ijiri and Simon (1964, 1977), Jovanovic (1982), Davies and Lyons (1982), Davies and Geroski (1997), and Sutton (1998).

  3. 3.

    For surveys and discussions of the Gibrat’s Law, see, for example, Curry and George (1983), Hall (1987), Davies (1988), and Geroski and Machin (1992).

  4. 4.

    For further details upon the data set and the measurement of variables, I refer the reader to Chap. 2.

  5. 5.

    Following De (2010), we can derive the formula for CV directly from the Herfindahl-Hirschman index, \(HHI =\displaystyle \frac{1}{N} + N*{\sigma ^2}\). Now \(N*{\sigma ^2}\) can be written as \(\displaystyle \frac{{{\sigma ^2}}}{{N/{N^2}}} \Rightarrow \frac{{{\sigma ^2}}}{{\left( {\frac{1}{{{N^2}}}} \right)*N}}\); replacing   \(\displaystyle \frac{1}{{{N^2}}}\) by  \({\mu ^2}\) we obtain \(\displaystyle \frac{{{\sigma ^2}}}{{{\mu ^2}*N}}\), so,  \(HHI = \displaystyle \frac{1}{N} + \displaystyle \frac{{{\sigma ^2}}}{{{\mu ^2}*N}} \Rightarrow HHI = \frac{1}{N} + C{V^2}*\frac{1}{N} \Rightarrow HHI = \frac{{C{V^2} + 1}}{N} \Rightarrow CV = \sqrt {N*HHI - 1}.\)

  6. 6.

    In the next chapter we analyse entry and market structure taking into account both firms’ interactions as well as observed firm heterogeneity.

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  1. Swansea University, Swansea, United Kingdom

    Giovanni Alberto Tabacco

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  1. Giovanni Alberto Tabacco
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Tabacco, G.A. (2017). Market Size, Firm Numbers and Market Share Asymmetry. In: Airline Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-46729-0_3

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  • DOI: https://doi.org/10.1007/978-3-319-46729-0_3

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