American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
When Demand Increases Cause Shakeouts
American Economic Journal: Microeconomics
vol. 11,
no. 4, November 2019
(pp. 216–49)
(Complimentary)
Abstract
Standard models that guide competition policy imply that demand increases should lead to more, not fewer firms. However, Sutton's (1991) model shows that demand increases instead can lead to shakeouts if non-price competition takes the form of fixed investments. We investigate this effect in the 1960s–1980s hotel and motel industry, where quality competition arose through investments in swimming pools. We show that demand increases associated with highway openings led to fewer firms, particularly in warm places. We do not find this effect in other industries that serve travelers, gasoline retailing, and restaurants, where quality competition does not involve fixed investments.Citation
Hubbard, Thomas N., and Michael J. Mazzeo. 2019. "When Demand Increases Cause Shakeouts." American Economic Journal: Microeconomics, 11 (4): 216–49. DOI: 10.1257/mic.20180040Additional Materials
JEL Classification
- G34 Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance
- K21 Antitrust Law
- L13 Oligopoly and Other Imperfect Markets
- L15 Information and Product Quality; Standardization and Compatibility
- L40 Antitrust Issues and Policies: General
- L83 Sports; Gambling; Restaurants; Recreation; Tourism
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