Marcus Asplund

Firm Turnover in Imperfectly Competitive Markets

This paper is motivated by the empirical regularity that industries differ greatly in the level of firm turnover and that entry and exit rates are positively correlated across industries. Our objective is to investigate the effect of fixed costs and, in particular, market size on entry and exit rates and hence on the age distribution of firms.We analyse a stochastic dynamic model of a monopolistically competitive industry. Each firms efficiency is assumed to follow a Markov process. We show existence and uniqueness of a stationary equilibrium with simultaneous entry and exit: efficient firms survive, while inefficient ones leave the market and are replaced by new entrants. We perform comparative dynamics with respect to the level of fixed costs: entry costs are negatively related and fixed production costs positively related to entry and exit rates. A central empirical prediction of the model is that the level of firm turnover is increasing in market size. In larger markets, competition is endogenously more intense than in smaller markets, and so price-cost margins are smaller. This price competition effect implies that the marginal surviving firm has to be more efficient than in smaller markets. Hence, in larger markets, the expected lifespan of firms is shorter, and the age distribution of firms is first-order stochastically dominated by that in smaller markets.In the empirical part, the prediction on market size and firm turnover is tested on an industry where firms compete in well-defined geographical markets of different sizes. Using data on hair salons in Sweden, we show that an increase in market size or fixed costs shifts the age distribution of firms towards younger firms, as predicted by the model. Copyright 2006, Wiley-Blackwell.

Price adjustments by a gasoline retail chain

We use daily data to examine price responses in the Swedish gasoline market to changes in the Rotterdam spot price, exchange rates and taxes. The distribution of price adjustments by a leading retail chain, for the period January 1980 to December 1996, is symmetric with no small adjustments. An error correction model shows that, in the short run, prices gradually move towards the long-run equilibrium in response to cost shocks. There is some evidence that, also in the short run, prices are stickier downwards than upwards. Prices respond more rapidly to exchange rate movements than to the spot market price. Our analysis emphasizes that to fully understand price adjustments it is necessary to examine data sets where the sample frequency at least matches that of price adjustments.

Risk-averse firms in oligopoly

Does risk aversion lead to softer or fiercer competition? To give a complete answer, I provide a framework that can accommodate a wide range of alternative assumptions regarding the nature of competition and types of uncertainty. I show how more risk aversion will influence a firms best response strategies, and that competition is unambiguously softer only in case of marginal cost uncertainty. In contrast to risk neutrality, the best response strategies depend on the level of fixed costs. This fact is extended to cover strategic investment models, and to analyse the importance of accumulated profits. I conclude by a discussion of how it is possible to test for risk-averse behaviour in oligopoly by conditioning on the type of uncertainty.

The Number of Firms and Production Capacity in Relation to Market Size

Many oligopoly theories predict a positive correlation between market size and the equilibrium number of firms and some also imply that competition is more intense in larger markets. The authors test these predictions on a sample of driving schools in 250 Swedish regional markets by estimating the relation between the number of firms, production capacity, and market size. The number of firms increases less than proportionally with market size. Market size per capacity unit is smaller in large markets. Since firms produce a fairly homogenous good, the authors argue that this is evidence that profits per capita is decreasing in market size. Copyright 1999 by Blackwell Publishing Ltd

Food Prices and Market Structure in Sweden

This paper examines retail grocery price levels across a large panel of stores in Sweden. We explain price variation across stores by market structure variables to capture differences in competition intensity and a number of store- and region-specific factors. Most of the explained variation in prices can be attributed to store-specific factors such as size and chain affiliation. Overall, the relation between market structure variables and food prices is weak, and effects are small in percentage terms. Nevertheless, higher local concentration of stores, higher regional wholesaler concentration and a lower market share of large stores are all correlated with higher prices.

The Survival of New Products

We study the survival of new products in a market with horizontal product differentiation and rapid product turnover. Our data set consists of monthly sales for all new products in the Swedish beer market during 1989–1995. Results show that products with low and decreasing market shares have high hazard rates. The hazard rates are also dependent on firm characteristics; products from firms with the largest market shares face a greater risk of being withdrawn. We argue that high hazard rates of new products can help to explain high failure rates of new firms.

Competition in Interrelated Markets: An Empirical Study

This paper studies competition in small, concentrated and inter-related 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.

Did the Swedish Tobacco Monopoly Set Monopoly Prices

Empirical evidence is scarce on whether firms set profit†maximizing prices, as these typically depend delicately on details of difficult†to†observe strategic interactions. To avoid this problem, this paper provides a detailed case study of the Swedish Tobacco Monopolys pricing with data from 1916 to 1959. Prices are found to be below those that maximize the expected net present value of profits. However, the difference between actual and optimal price diminishes over time, and towards the end of the period the two are almost indistinguishable. The net present value of actual profits is approximately 60% of what could have been obtained. Overall, the pricing patterns appear more consistent with the firm learning about demand conditions than being the result of maximization of something other than profits.