Working Paper: NBER ID: w11847
Authors: Jeffrey R. Campbell
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: competition; market size; restaurant pricing; strategic interactions
JEL Codes: L11; L81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increasing a city's size (R12) | Increase in average sales revenue (O49) |
| Increasing a city's size (R12) | Increase in restaurant seating capacities (L83) |
| Increasing a city's size (R12) | Decrease in exit rates (J63) |
| Increasing a city's size (R12) | Decrease in prices (E31) |