SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

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

JEL-codes: C24; C25; D43; L11; L13; L89; R32

25 pages, January 1996

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