When Demand Increases Cause Shakeouts / Thomas N. Hubbard, Michael J. Mazzeo.

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Hubbard, Thomas N

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w23639.Publication details: Cambridge, Mass. National Bureau of Economic Research 2017.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: Standard economic models that guide competition policy imply that demand increases should lead to more, not fewer firms. However, Sutton's (1991) model illustrates that in some cases, demand increases can catalyze competitive responses that bring about shake-outs. This paper provides empirical evidence of this effect in the 1960s-1980s hotel and motel industry, an industry where quality competition increasingly took the form of whether firms supplied outdoor recreational amenities such as swimming pools. We find that openings of new Interstate Highways are associated with increases in hotel employment, but decreases in the number of firms, in local areas. We further find that while highway construction is associated with increases in hotel employment in both warm and cold places, it only leads to fewer firms in warm places (where outdoor amenities were more valued by consumers). Finally, we find no evidence of this effect in other industries that serve highway travelers, gasoline retailing or restaurants, where quality competition is either less important or quality is supplied more through variable costs. We discuss the implications of these results for competition policy, and how they highlight the importance and challenge of distinguishing between "natural" and "market-power-driven" increases in concentration.

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Previous	nber w23636 Hours, Occupations, and Gender Differences in Labor Market Outcomes /	nber w23637 Multi Product Firms, Import Competition, and the Evolution of Firm-product Technical Efficiencies /	nber w23638 Using Goals to Motivate College Students: Theory and Evidence from Field Experiments /	nber w23639 When Demand Increases Cause Shakeouts /	nber w2364 On the Interpretation of Near Random-Walk Behavior in GNP /	nber w23640 The Landscape of US Generic Prescription Drug Markets, 2004-2016 /	nber w23641 Estimating the Value of Higher Education Financial Aid: Evidence from a Field Experiment /	Next

July 2017.

Standard economic models that guide competition policy imply that demand increases should lead to more, not fewer firms. However, Sutton's (1991) model illustrates that in some cases, demand increases can catalyze competitive responses that bring about shake-outs. This paper provides empirical evidence of this effect in the 1960s-1980s hotel and motel industry, an industry where quality competition increasingly took the form of whether firms supplied outdoor recreational amenities such as swimming pools. We find that openings of new Interstate Highways are associated with increases in hotel employment, but decreases in the number of firms, in local areas. We further find that while highway construction is associated with increases in hotel employment in both warm and cold places, it only leads to fewer firms in warm places (where outdoor amenities were more valued by consumers). Finally, we find no evidence of this effect in other industries that serve highway travelers, gasoline retailing or restaurants, where quality competition is either less important or quality is supplied more through variable costs. We discuss the implications of these results for competition policy, and how they highlight the importance and challenge of distinguishing between "natural" and "market-power-driven" increases in concentration.