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

No 288:
On the size distributions of firms and markets

Marcus Asplund

Abstract: Two weak restrictions on equilibrium market structures are that firms who decide to enter make sufficient profits to cover entry costs and fixed costs of production, and that no new firm could profitably enter. I examine these restrictions by the size distribution of firms in the same industry, but who compete in different geographical markets. The industry is characterised by small exogenous entry costs, comparatively large fixed costs of production, negligible efficiency differences, and primarily spatial product differentiation. The inherent symmetry of conditions results in a strong tendency towards equal sized firms within markets. Market structures with many small firms are never observed and rarely are those with a few large firms, thereby illustrating the bite of the two restrictions. Finally, I show that a skewed size distribution of firms at the industry level can be explained by an underlying skewed distribution of market sizes.

Keywords: Size distribution of firms; market structure; market size; exogenous sunk costs; spatial product differentiation; driving schools; (follow links to similar papers)

JEL-Codes: L11; L84; (follow links to similar papers)

18 pages, December 9, 1998

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