On the size distributions of firms and markets

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 characterized 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.

Introduction: One empirical regularity of industries is that the size distribution of firms is skewed (e.g., Schmalensee, 1989, Sutton, 1997a). The skewness has been attributed to various factors such as efficiency differences, product differentiation, and ‘pure chance’. In the first part of this paper I examine the importance of market size on the size distribution of firms in the Swedish driving school industry. At the industry level the size distribution displays positive skewness; many small firms and a few large ones.To what extent is the industry pattern explained by an underlying distribution of market sizes where firms compete?

Author: Marcus Asplund

Source: Stockholm School of Economics

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