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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 87:
Estimating the number of firms and capacity in small markets

Marcus Asplund and Rickard Sandin

Abstract: Many oligopoly theories predict that there will be a positive correlation between market size and the equilibrium number of firms, and some also imply that competition is more intense in larger markets. We test these predictions with a sample of 535 driving schools in 249 markets. With an ordered Probit, a Tobit, and a Poisson model we estimate the relation between the number of firms, capacity, and market size. We find a strong positive correlation between market size and the number of firms. The results show that the per firm market size is increasing in the number of firms in the market. The market size per capacity unit is smaller in large markets. Since the industry produces a fairly homogenous good, we argue that this is evidence that competition is increasing in market size.

Keywords: Industry structure; capacity; entry thresholds; count data; driving schools; (follow links to similar papers)

JEL-Codes: C24; C25; D43; L11; L13; L89; R32; (follow links to similar papers)

25 pages, January 1996

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This paper is published as:
Asplund, Marcus and Rickard Sandin, (1999), 'The Number of Firms and Production Capacity in Relation to Market Size', Journal of Industrial Economics, Vol. 47, pages 69-86



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