MARKET SIZE MATTERS

Abstract

THIS PAPER EXAMINES EMPIRICALLY the effects of market size on producers’ sizes in industries with many producers. A robust prediction of oligopoly theory is that larger markets are more competitive and have lower price-cost markups. Because producers in more competitive markets must recover their fixed costs by selling more at a lower markup, our estimated market size effects indicate whether or not this prediction of oligopoly theory carries over to large-group competition. Our analysis uses observations from thirteen narrowly-defined retail trade industries in 225 metropolitan statistical areas (MSAs), each of which we identify with a separate market. In all of the industries we consider, almost all of these MSAs contain a large number of establishments. Our primary data source is the 1992 Census of Retail Trade (CRT), from which we calculate establishments’ average sales and employment in each market. We supplement these measures with observations of the empirical c.d.f. of establishments’ sizes from the 1992 County Business Patterns (CBP). We regress these statistics from the size distribution against the MSA’s market size and a set of control variables. The control variables account for differences in MSAs’ factor prices and demographics, which covary with market size and can by themselves affect retailers’ sizes.