Market Size and Market Power

Abstract

We propose a method of estimating the market sizes of differentiated product markets using data on firm entries and quantities sold. Market sizes are often unobserved, and observing quantities is insufficient for computing market shares, which are key inputs to market power estimation. Our approach exploits an entry model with competition in differentiated product markets to estimate the joint distribution of equilibrium entries and market shares. Market sizes are recovered through an accounting relationship between quantities and market shares. We demonstrate an application of our method to local craft beer markets.

Keywords: Market size, market share, market power, entry, differentiated products.

JEL Classification: L11, L12, L13.