Market size, fixed costs and horizontal concentration

Abstract

A Cournot oligopoly model is used to relate horizontal concentration to market size and fixed costs. Assuming that higher fixed costs yield a lower level of marginal costs, a vertically and horizontally growing market size is shown to cause horizontal concentration to decline if there is free entry. In an empirical test focusing on changes in total production, the number of suppliers and the variance of market shares in 291 lines of business in West Germany over the period 1978–1993 we find evidence for the existence of entry barriers.