Product Quality and Market Size
Yale University - Department of Economics; National Bureau of Economic Research (NBER)
University of Minnesota - Twin Cities - Carlson School of Management; National Bureau of Economic Research (NBER); University of Minnesota - Twin Cities - Department of Economics
Yale Working Papers on Economic Applications and Policy Discussion Paper No. 1
Do larger markets offer better products? The question has implications both for theories of cities and for theories of market organization. We document that in the restaurant industry, where quality is produced largely with variable costs, the range of qualities on offer increases in market size, with each product maintaining a small market share. In daily newspapers, where quality is produced with fixed costs, the average quality of products increases with market size, but the market does not offer much additional variety as it grows large. These results are consistent with recent IO theories of endogenous product quality and are consistent with theories of cities that place an emphasis on the consumption advantages of cities.
Number of Pages in PDF File: 37
Keywords: quality competition, newspapers, restaurants
JEL Classification: L11, L13, L82working papers series
Date posted: October 5, 2005
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