Heterogeneity in oligopoly : theories and tests

Sammanfattning: This dissertation consists of five separate chapters, of which the three first three are empirical and the last two are theoretical. Chapter 1: Competition in Interrelated Markets: An Empirical Study. (Co-authored with Marcus Asplund.)This chapter studies competition in small, concentrated and interrelated markets. Our data set consists of price information from 543 driving schools in 250 local markets in Sweden, which gives a large sample to test hypotheses on how market structure influences competition. The results show that if prices in nearby markets are low, and the distances to them are short, it reduces prices, as suggested in models of spatial competition. Moreover, we find that prices in closely located markets are interdependent. It is also shown that prices are increasing in firm concentration within a market, as most theories of oligopoly predict. Chapter 2: Estimating the Number of Firms and Capacity in Small Markets. (Co-authored with Marcus Asplund.)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. Chapter 3: The Survival of New Products. (Co-authored with Marcus Asplund.)We study the product turnover in an industry and, in particular, the survival of new products. The data set consists of monthly sales of all products sold in the Swedish beer market over the time period of 1989-1995. The death rates of newly introduced products are high - out of 199 products an estimated 25 percent were withdrawn within 18 months and 50 percent within approximately 48 months. We use parametric duration models with time varying covariates to estimate survival functions. Our results show that products with low and decreasing market shares have higher hazard rates. Moreover, the hazard rates are dependent on the characteristics of the producer. Products from firms with a large number of other products, and (to a lesser extent) the largest market shares are more likely to be withdrawn. Chapter 4: Uniform Subsidy Reductions in International Oligopoly.This chapter studies the effect of production subsidies used as strategic instruments by two rivalling countries whose firms differ in production efficiency. In particular, it examines the welfare effects of a uniform subsidy reduction from the Cournot-Nash equilibrium under different assumptions regarding technology and taste. It is found that the net exporter (usually the efficient country) gains while the net importer (usually the inefficient country) loses from a uniform subsidy reduction. Results show that a non-linear demand function or marginal cost functions with different slopes across countries is necessary to obtain an increase in total welfare.Chapter 5: Subsidies in Oligopoly Markets: A Welfare Comparison between Symmetric and Asymmetric Costs. (Co-authored with Stephen F. Hamilton.)This chapter studies welfare effects of uniform production subsidies in oligopoly markets, comparing cases of symmetric and asymmetric costs. Cost asymmetry reduces the impact relative to the symmetric-cost case if the deman function is concave and magnifies the impact if demand is convex. The welfare difference increases with the degree of market power and the cost differential in the industry.