Pricing and Market Concentration in Oligopoly

Markets
1
(Preliminary. Comments welcome)
Vishal Singh Ting Zhu
March 8, 2006
1
The authors are Assistant Professor of Marketing and Doctoral Student in Marketing re-
spectively at Tepper School of Business, Carnegie Mellon University. They can be reached at
vsingh@andrew.cmu.edu (Singh) and tzhu@andrew.cmu.edu (Zhu) for comments and sugges-
tions. The authors are listed in alphabetical order and contributed equally.
Abstract
We study the relationship between prices and market concentration in the Auto Rental
Industry. We develop an original database that includes the number of auto rental operat-
ing rms at every commercial airport in the country. The data is particularly interesting
as we observe a large variation in market structure ranging from over 100 monopoly and
duopoly markets to several airports with more than nine rms. In addition we collect
daily rental prices in each market that are regressed against the market structure vari-
ables and other control factors. Unlike most previous studies we explicitly account for
endogeneity of market structure in the price regressions. In particular, we estimate a
static entry model for predicting the equilibrium number of rms in the rst stage. The
parameters from the entry model are then used to derive terms that are inserted in the
price equation to correct for endogeneity of competitive parameters. Our results show
that ignoring this endogeneity severely biases the market structure parameters. The
prices in concentrated markets (monopoly/duopoly) are found to be approximately 30%
higher compared to competitive markets with seven or eight rms. Policy implications
of our model and results are discussed.
Keywords: Price, Market Concentration, Entry Models, Auto Rental
1 Introduction
A long stream of literature in economics and marketing strategy examines the relation-
ship between competitive characteristics of a market and protability. In the structure-
conduct-performance paradigm of industrial organization, this literature relies on a cross-
sectional data across industries to document the impact of market concentration on prof-
itability. A general nding in this literature is that higher market shares and seller
concentration are associated with higher protability (see for example, Buzzell et. al
1987, Schmalensee 1989). However, the prot-concentration studies have been criticized
on several grounds. First, these studies are plagued by measurement problems as account-
ing prots are in general poor indicators of economic prots. Second, the cross-sectional
data from dierent industries used in these studies is problematic due to large dierences
in demand and supply conditions across industries. Finally, these studies are subject to
the eciency critique oered by Demsetz (1973) who argued that positive correlation
between prots and market concentration could be due to the competitive superiority of
a few rms.
Over the past several decades, the prot-concentration studies have been replaced by
a stream of research that examines the relationship between market structure and prices,
rather than prots. An advantage of using prices as opposed to prots is that they are
easier to obtain and are not subject to accounting conventions. Weiss (1989) provides
a collection of large number of price-concentration studies and argues that since prices
are determined in the market, they are not subject to superiority criticism like prots.
Furthermore, majority of the price-concentration studies use data across local markets
within an industry rather than across industries
1
. These studies include a wide range of
industries such as Grocery (Cotterill 1986), Banking (Calem and Carlino 1991), Airlines
(Borenstein and Rose 1994), Hospitals (Keeler, Melnick and Zwanziger 1999), Driving
lessons (Asplund and Sandin 1999), Cable television (Emmons and Prager 1997), Movie
theaters (Davis 2005) and so on.
A general nding in this literature is that high concentration is associated with signif-
icantly higher prices (Weiss 1989, see also various studies cited in a recent survey by New-
mark (2004)). However, as pointed out by both Bresnahan (1989) and Schmalensee (1989)
1
Now, virtually all structural empirical work in economics and marketing is industry-specic. These
studies incorporate more industry- and rm-specic details to provide a deeper understanding on the
underlying economic primitives of demand, cost, and competitive behavior. See for example recent
surveys by Kadiyali et al. (2001), Dube et al. (2004), Reiss and Wolak (2004), and Chintagunta et al.
(2004).
1
in their chapters in the Handbook of Industrial Organization, the price-concentration re-
gressions such as those used in the literature suer from serious endogeneity issues. In
particular, there might be unobserved demand and cost shocks in a market that not only
inuence prices but also the underlying market structure. For instance, a market with
unobserved high costs are likely to have higher prices, but these markets are also likely
to attract fewer entrants. Evans, Froeb and Werden (1993) formally address this issue
and propose a combination of xed eects and instrumental variable procedures that are
applicable when one has access to panel data. They study the price-concentration in the
airline industry and nd that the eect of concentration on price is severely biased using
OLS procedures.
Recent structural work in marketing (see Chintagunta et al. (2006) and the accompa-
nying comments) has pointed out the endogeneity problems associated with short term
marketing activities such as pricing and promotions, while taking the underlying competi-
tive structure in the industry as exogenous. However, the endogeneity of market structure
is a serious problem in the price-concentration studies such as those mentioned above.
The bias in the parameters capturing the competitive interactions can also have impor-
tant policy implications. As Whinston (2003) points out, price-concentration studies are
one of the most commonly used econometric technique employed by FTC in analyzing
horizontal mergers. Similarly, Baker and Rubinfeld (1999) note that reduced form price
equations are the workhorse empirical methods for antitrust litigation....
The following example from a highly litigated case on the merger between Staples and
Oce Depot underscores the importance of considering market structure as endogenous
when analyzing relationship between price and number of rms in the market. Table
1 reports one of the important evidence used by FTC to challenge the merger between
the two rms and eventually decline it
2
. The table shows the advertised prices of ve
products at Oce Depot from two markets: Orlando, FL and Leesburg, FL. Oce Depot
is a monopolist in the Leesburg market, while Orlando market is an Oligopoly with three
oce supply rms (Oce Max and Staples being the other two). It is quite evident
that the prices in monopoly market are signicantly higher. However, a fundamental
question that must be addressed is whether higher prices in Leesburg are driven by lack
of competition alone. In particular, one needs to consider the underlying demand and
cost conditions that result in a monopoly in one market but allow several rms to enter
2
FEDERAL TRADE COMMISSION, Plainti, vs. STAPLES, INC. and OFFICE DE-
POT, INC. Defendants. Case No. 1:97CV00701. The table reported can be found at:
http://www.ftc.gov/os/1997/04/pubbrief.htm
2
in another. Positive correlation between price and market concentration could result
if, for example, there are unobserved high costs in Leesburg that not only results in
higher prices but also attract fewer entrants. Similarly demand conditions may vary
systematically across markets (for example the population of Orlando is ten times that
in Leesburg) such that certain markets are only able to sustain small number of rms.
In this paper we study the relationship between price and number of rms in the auto
rental industry. We develop an original data set that includes the number of car rental
rms at every commercial airport in the United States. The data is quite unique in that
we observe a wide cross-section of market structures ranging from several monopoly and
duopoly markets to many airports with more than nine rms. For each of these markets
we collect an extensive set of variables that capture the demand and cost conditions.
These variables include both airport specic factors (e.g. airline passenger trac) as well
as local demographics in the city where the airport is located (e.g. income, retail wages).
In addition we have collected data on daily rental prices from every rm and for each car
type (economy, full size, etc.). Thus our data set consists of approximately 450 markets
(airports) for which we observe the number of rms serving each market and the prices
they charge.
Our primary objective in this paper is to test how the prices change with the number
of competitors in the market. However, in doing so we take into account the endogeneity
of market structure. Since we observe only a cross-section of markets, we cannot use the
approach used in Evans et. al (1993) that requires a panel data structure. Instead, we use
a two-stage estimation procedure to address the endogeneity of market structure. In the
rst stage, we estimate an equilibrium model of entry that predicts the number of com-
peting rms in a market. In particular, we follow the literature advanced by Bresnahan
and Reiss (1987, 1990, 1991) and Berry (1992) that endogenizes the competitive structure
characteristics such as number of rms and degree of concentration in the market. The
key insight underlying the research is that we can infer features of latent prot functions
by observing entry decisions of rms as they will enter if they expect positive prots,
but not otherwise. Since market entry decisions are discrete, the model suggests using
a discrete choice framework to draw inferences about the factors that impact a rms
actions. The approach parallels the standard single-agent discrete choice models where
the researcher makes inferences about unobserved latent utility based on the inequality
restrictions. However, in the case of entry games, payos and resulting behavior reect
the interaction of decisions of multiple individual agents. Thus, estimation is based on an
oligopolistic equilibrium concept rather than on an individual utility maximization. In
3
the empirical application, the parameter estimates from this rst stage entry model are
used to derive correction terms that are inserted in the price equation to correct for the
correlation between the price errors and the market structure variables. The procedure
is similar to the two-step estimation used widely in labor econometrics (Heckman 1976,
1979)
3
.
Our application in this paper is to the auto rental industry, which oers several
advantages over the industries considered in previous applications. As discussed in the
data section below, the industry is interesting as we observe a wide range of market
structures ranging from 68 monopoly markets to over 50 competitive markets with more
than nine rms. In addition, most previous price-concentration applications suer from
problems related to market denition and price measurement, which is less of a concern
in the auto rental industry. Consider, for example, the Grocery industry studied in
Cotterill (1986) where market denition and trading areas are quite dicult to dene.
The problem in this industry is magnied due to the fact that product assortments tend
to overlap across a wide range of retail formats. For example, supermarkets, discount
stores, dollar stores, price clubs, and supercenters all tend to have signicant overlap
in product assortment which makes the industry denition itself dicult. In addition,
grocery retailers are multi-product rms carrying thousands of products which makes the
collection and comparison of prices for all products very dicult, if not impossible. The
common approach to deal with the problem is to create some aggregate price indexes
or rely on the prices from a handful of products. For example, Manuszak and Moul
(2006) revisit the Oce Depot and Staples merger case and use data from ve products.
They use a similar approach to correct for endogeneity of market structure in the price
regression as that described in this paper.
The auto rental industry analyzed in this paper overcomes the problems associated
with market denition and price measurement to a large extent. The market in this
industry is reasonably well dened since the primary clientele for auto rentals at the
airport locations are the passengers ying into the airport (according to rms Annual
Reports). While airport locations would be competing with outlets in downtowns or
other city locations that we do not consider, the problem is less severe compared to
market denitions in previous studies. Similarly the price information is reasonably easy
to collect and compare across rms and markets as (at least at the outlet level) these are
single product rms with car rental being the primary business. Finally, the product is
3
See also various examples in Maddala (1983.) Recent applications in context of market concentration
include Mazzeo (2002) and Zhu et al. (2005).
4
fairly homogenous in that the quality of a particular car-type tends to be similar across
rms, although these rms may dier in terms of service quality.
Results from the rst-stage model show that many demand and cost factors such as
airport trac, wages, and local demographics are important determinants in rms entry
decisions. In addition, parameters of the latent payo functions show that prots are
higher in holiday markets as well as markets with headquarters for large rms, while
markets with better infrastructure of public transportation have lower prots. Entry of
additional competitors in the market signicantly reduces prots, although the impact
is higher for the rst few entrants. For pricing, several of the demand and cost control
variables, service quality (in-terminal counters), and product quality (car size) are found
to be signicant. In terms of the primary focus of the paper, we nd that concentrated
markets (those with fewer than three rms) have prices that are approximately 30-35%
higher than competitive markets (with more than seven rms). More importantly, we
nd that ignoring this endogeneity of market structure in the price regressions severely
biases the competition parameters. In particular, the competitive interaction parameters
are double in magnitude once we insert the correction terms in the price equation. The
magnitude of bias is similar to those reported in Evans, Foreb and Werden (1993) who
nd OLS parameters to be biased in the magnitude of 150 to 250 percent.
The rest of the paper is structured as follows. In the next section we describe the
price regression, rst-stage entry model, and the correction procedure. Data from the
auto rental market is discussed in Section 3 and we present the results in Section 4 where
we also provide robustness checks and discuss the implications of our ndings. Section 5
concludes.
2 Model
2.1 Price and Market Concentration
Consider a typical price-concentration regression model where the relationship between
the prices, exogenous market characteristics, and the market structure variables can be
specied as follows:
ln p
m
= Z
m
+f (N
m
, ) +
p
m
, (1)
where p
m
are the observed prices in market m, Z
m
are all exogenous market characteristics
that aect prices except the market structure variables. The function f (N
m
, ) represents
the impact of the underlying market structure on prices. In empirical applications, the
5
market structure variables are typically captured using measures such as concentration
ratio or Herndahl Index. Finally,
p
m
are market specic unobservables that inuence
prices.
In context of the current paper, our dependent variable p
m
would be the price of a
particular car-type (e.g. economy) at each airport location, and the exogenous variables
Z
m
would include demand and cost conditions at the airports such as number of pas-
sengers ying into the airport, local demographics, and other controls such as rm and
car-size xed eects. Since we do not observe market shares in our data, we can not
use concentration ratio or Herndahl Index. Instead the competitive structure in our
application is captured by including the total number of car rental rms oering services
at the airport. In the empirical application, we also run models using a exible dummy
specication for Monopoly, Duopoly, etc. markets.
The price equation in (1) represents a typical model used in the price-concentration
literature (see for example various studies in Weiss 1989). As is well known, ordinary
least squares estimator applied to such a model is inconsistent if the unobservable
p
m
are
correlated with explanatory variables in the regression. Of particular concern in (1) are
the variables that capture the competitive structure,f (N
m
, ) , since there are likely to
be unobservable demand and cost conditions in a market that not only inuence prices,
but also the number of the rms that operate in the market. For instance, markets with
unusually high costs are likely to have higher prices, but these markets are also likely
to attract fewer entrants. Similarly, unobserved positive or negative demand shocks can
inuence a rms pricing as well as decision to operate in the market.
A possible solution to this econometric problem is to use instrumental variable tech-
niques. For example, one could look for variables that impact the long-term entry deci-
sions of the rms, but do not impact the short-term prices. However, such instruments
are, in general, dicult to nd. Instead, we use a two-stage estimation procedure to
address the endogeneity of market structure. In the rst stage, we estimate an equilib-
rium model of entry that predicts the number of competing rms in a market. In the
second stage, estimates from the entry model are used to derive correction terms that are
inserted in the price equation to alleviate the correlation between the price errors and
the market structure variables.
2.2 Endogenous Entry Decisions
To model the number of car rental companies operating at an airport, we follow the
literature on multi-agent discrete games, which provides an empirical approach to analyze
6
game theoretic models where agents make discrete choices such as entry and exit (see
Reiss 1996 for a survey). The approach is advanced by Bresnahan and Reiss (BR)
(1990, 1991). The authors develop econometric models to investigate how the number
of rms varies across markets due to various demand and cost factors. The approach
endogenizes the competitive structure in the market by implicitly analyzing the rst
stage of a two stage game in which rms rst decide whether or not to enter followed by
price or quantity competition. The key insight underlying the research is that we can
infer features of latent prots by observing entry decisions of rms as they will enter if
they expect positive prots, but will not enter otherwise.
Unlike the structural models of supply and demand that provide marginal conditions,
discrete decisions imply threshold conditions for players unobserved prots. Economet-
rically, this feature of the model suggests using a discrete choice framework to draw
inferences about the factors that impact a rms actions. However, unlike the single-
agent discrete choice models that have been used extensively in the marketing literature
to model consumer choice, in the case of a discrete game, payos and resulting behavior
reect the interaction of decisions of multiple agents. Thus, estimation is based on an
oligopolistic equilibrium concept rather than on an individual utility maximization.
Assume that rm ks latent prots in market m with N entrants ( including itself)
can be specied as follows:

N
mk
=
N
m
(X
m
; ) +
mk
,
This prot function has two components:
m
(X
m
; ) captures the expected payos as
a function of exogenous demand and cost shifters
4
, X
m
, and the number of competitors
(N) in the market, while
mk
summarizes the unobserved characteristics. To identify
the parameters of the model, an equilibrium assumption is imposed that all active rms
expect non-negative prots while additional entrant would nd entry into the market
as unprotable. In BRs framework where all rms are symmetric, i.e.,
mk
=
m
, the
equilibrium assumption implies that the probability of observing n active rms in a
market is
P (N
m
= n) = Pr
_

n
m
0 and
n+1
m
< 0
_
(2)
= Pr
_

n
m

m
<
n+1
m
_
= F (
n
m
) F
_

n+1
m
_
,
4
Although exclusion restrictions are not required for identication due to the non-linear functional
form, our empirical application includes several variables in the entry model that are not included in
the price regression. For example, variables such as previous years annual airport trac and population
growth rate of previous years are likely to impact rms entry decisions but not short-term pricing.
7
where F (.) is the cdf of
m
. Finally, if a rm does not enter a market, its payo in that
market is normalized to zero. Therefore
P (N
m
= 0) = Pr
_

1
m
< 0
_
= 1 F
_

1
m
_
.
While restrictive, the model above generates close form solutions for the probability
of each market conguration. In the empirical application, we also estimate a variant
of the model proposed by Berry (1992), which allows for between rm heterogeneity by
introducing rm specic unobservables. Following Berry (1992), we dene rm ks prot
when there are N players at market m as

mk
(N) = X
m
+
1

n=2

n
+
mk
(3)
where
mk
= u
m0
+u
mk
,
n
0 for n = 2, ..., N.
where, X
m
represents the observed market characteristics and
1


N
n=2

n
captures
how a rms prot decreases as more competitors enter the market. Note that is a
more exible specication for capturing the competition eect compared to ln(N) used
in Berry (1992). The term u
m0
represents characteristics of the market that are observed
by the rms, but not econometrician,and u
mk
are rm specic unobservables. Thus, this
model allows for heterogeneity across rms. u
mk
and u
m0
are assumed to distributed i.i.d.
standard normal across rms and markets. For identication, we impose the traditional
constraint that the variance of
mk
equal one, via the restriction =
_
1
2
, where
is the correlation of the unobservable
mk
in a given market.
Firm k will enter market m given that there are N 1 players in the markets if

mk
(N) > 0. Assuming that prots are declining in rivals entry, and the ranking of
protability (which is determined by the ranking of u
mk
in our application) does not
change with the set of entering rms, a Nash equilibrium exits in each market. However,
the uniqueness of the equilibrium is not guaranteed since the identities of the entering
rm are dierent in dierent equilibrium. This multiplicity of equilibria where certain
values of the underlying latent payos could simultaneously be consistent with more than
one equilibrium outcome is a common problem in multi-agent discrete games. For the
current setup, Berry(1992) proves that although the identities of entering rms are not
unique across equilibria, the number of rms which is dened as
N
m
= max
n
(n : #{k :
mk
(n,
mk
) 0}) , (4)
8
is uniquely determined. Hence we can base an estimation strategy on this unique number
of rms.
An additional complication with this framework is the complex inequalities that the
model yields for a certain outcome to be an equilibrium. In terms of the stochastic
structure of the model, these inequalities translate into complex regions of integration
for the models unobservables. For example, with K potential entrants in the market,
the equilibrium number of rms in the market could be 0, 1, 2, ..., K, K+1 possible mu-
tually exclusive outcomes in total. Since the number of entering rms (N) is uniquely
determined from the model, the probability of each outcome is well dened. For example,
Pr (N
m
= 0) =
_
xm
1

_
xm
1

...
_
xm
1

dF (
m1
,
m2
, ...
mK
) . (5)
As we can see, the calculation of the probability involves high-dimensional integration
with large number of players in the market. In addition, the regions of space that
leads to an N rm equilibrium is hard to describe. The fundamental problem arises from
the large number of possible combination of entering rms, which leads to summation of
dierent integration region. For example,
Pr (N
m
= 1) =
K

i=1
Pr (
m
B
mi
)
K

i=1

j=i
Pr (
m
(B
mi
B
mj
)) (6)
+
K

i=1

j=i

l=i,j
Pr (
m
((B
mi
B
mj
B
ml
))) +...
+ (1)
K+1
Pr (
m
(B
m1
B
m2
... B
mK
))
where B
mi
is dened as the region of
m
that satises the conditions of rm i being a
monopoly in the market:
B
mi
=
_

m
:
mi
(1) > 0 and
m(i)
(2) < 0
_
.
The expression of the probability of the a market being monopoly is complicated be-
cause B
mi
and B
mj
overlap on the region where both rms would make a prot as a
monopolist but neither would make a prot in a duopoly. This is the set that yields
multiple equilibrium. The expression for Pr (N
m
= n) becomes far more complicated as
n increases.
Berry (1992) proposes simulation methods to solve the problem and denes a pre-
diction error as the dierence between the observed number of rms and the expected
number of rms E(N|, , x
m
) from the model:

m
=N
m
E(N|, , x
m
). (7)
9
By construction,
m
is mean independent of the exogenous data when evaluated at the
true parameter values:
E [
m
|x
m
, =

, =

] = 0. (8)
Given the condition, either nonlinear regression or GMM can be used to estimate the
model. In order to get the E(N|, , x
m
), we use simulation technique. Given S draws
for the underlying random variables
m
and guesses of and , we can construct the
equilibrium number of rms

N (
s
, , , x
m
). The estimate of E(N|, , x
m
) is simply
E(N|, , x
m
) =
1
S
S

s=1

N (
s
, , , x
m
) . (9)
In our application, we use frequency estimator discussed above to construct the pre-
dicted number of entrants for each market, and use nonlinear regression technique to
estimate the parameters that minimize the distance between the predicted the number
of rms and the observed number of rms in the data.
2.3 Correcting for Endogenous Market Structure in the Price
Equation
Having estimated the parameters from the latent payo functions, we derive correction
terms that will be inserted in the price regression to correct for the potential correlation
between the price errors and the market structure variables. The procedure is similar
to the selection correction used frequently in labor econometrics (Heckman 1976, 1979).
More formally, we specify the correlation of the error terms for the prices and the entry
payos as follows
5
:
_

m

p
m
_
BV N
__
0
0
_
,
_
1

2
__
. (10)
where
p
m
given
m
represent the error terms from the price and entry model and is
the covariance between the two. With normally distributed error terms, the conditional
distribution of
p
m
given
m
is also normal with mean equal to
E [
p
m
|
m
] =
m
.
5
Although Hechmans two stage approach was proposed in the context of a parametric model with
normal distribution, the method can be extended to non-normal errors. With exclusion restrictions for
model identication, a more exible polynomial approximation can be used for the second stage error
correction.
10
The expectation of
p
m
varies under dierent market structure. Given the observed num-
ber of rms N
m
, we can represent the error term in price regression as follows

p
m
|N
m
= E [
m
|N
m
] +v
p
m
, (11)
where v
p
m
now is the pure idiosyncratic error term eecting prices.
Under BRs specication of a rms entry payo, an expression of E [
m
|N
m
] can be
obtained as follows:
E [
m
|N
m
] =
_

Nm+1
m

Nm
m

()
(
Nm
m
) (
Nm+1
m
)
d (12)
=

_

Nm
m
_

_

Nm+1
m
_
(
Nm
m
) (
Nm+1
m
)
.
In the empirical application, we insert the estimates of E [
m
|N
m
] form the rst stage
entry model in the price regression where the covariance between
m
and
p
m
, , becomes
an additional parameter to be estimated.
A similar error correction term can be obtained from the entry model that allows for
rm heterogeneity to be used in the price regression. In particular, assuming that
p
m
is
only correlated with the market level unobservables, the price regression can be specied
as
ln P
m
= Z
m
+f (N
m
,
p
) +E [
p
m
|u
m0
: N = N
m
] +v
p
m
(13)
where v
p
m
=
p
m
E [
p
m
|u
m0
: N = N
m
] . Note however, that with this specication there
is no close form solution for E [
p
m
|u
m0
: N = N
m
] so we rely on simulation techniques.
To illustrate how the competitive interaction parameters may be biased by ignoring
the endogeneity of market structure consider the following simple example. Suppose our
sample consists of three airport markets for which we observe the number of car rental
rms and corresponding prices. For simplicity, assume that the only observed market
condition in our data is airport trac which is either High(H) or Low(L). In addition,
there are market specic unobservables
m
that impact rms entry decision and are
assumed to take one of the two values: 0 or 1. Suppose the observed prices, market
structure, trac, and unobservables from the three markets are as follows:
Market Trac # of rms Unobservable
m
Price
A L 1 0 p
A
B H 1 1 p
B
C H 2 0 p
C
11
Here Market B has high trac but only one rm enters this market due to unob-
served negative shocks (
m
= 1). These negative shocks could be related to cost factors
(e.g. high wages) or demand factors (e.g. good public transportation) both of which
are likely to deter entry. At the same time, these negative shocks could inuence rms
pricing decisions. Note however, the impact of these unobservables will be dierent on
market structure and prices depending on whether cost or demand factors dominate. For
example, negative demand shocks result in lower entry and lower prices, while high costs
would result in lower probability of rm entry but higher prices. Figure 1 illustrates
the bias depending on the direction of correlation which is also summarized in the Table
below. The correlation between the unobserved factors inuencing prices and entry is
represented by , while
true
and
true
represent the competition and trac parameters
in the price regression. When the correlation is positive, both
true
and
true
are underes-
timated as and are from the regression without considering the impact of
m
, while
the opposite is true for < 0.
True Parameter Biased
Values Estimates > 0 < 0
Competition Eect
true
= p
B
p
C
= p
B
p
C

true
>
true
<
Sensitivity to Trac
true
=
p

B
p
A
HL
=
p
B
p
A
HL

true
>
true
<
3 Data Description
Our application in this paper is to the auto rental industry. The car rental business
began as early as 1918, with small operators providing car rentals to individuals in local
markets. Currently, the industry is fairly consolidated with eight major rms along
with a host of regional operators who conduct their operations through combination
of company-owned and licensee operated locations. Most of these rms have locations
in local markets as well commercial airports. The local city locations typically target
individuals who need a vehicle for special occasions, insurance replacements, and repairs,
while the airport locations are primarily geared towards business and leisure travelers.
With the deregulation in the airline industry, the number of airport locations has grown
dramatically over years and now account for a signicant proportion of revenues for
most companies. For instance, Hertz generates 90% of its revenues from its airport
12
locations in the US (2003 Annual Report). In this study we focus on the airport car
rental locations for which we develop an original database that consists of three major
pieces of information: (1) List of all domestic commercial airports and exogenous variables
describing each airport, (2) Number and identities of all car rental companies operating
at those airports, (3) Rental price for each car type (economy to full size).
Given the three pieces of information, the auto rental industry seems quite suitable
for the purpose of the study for several reasons. First, our data is quite complete in
that we have been able to collect information on number of rms and prices for every
commercial airport in the country. Second, our focus on only airport locations makes
the market denition reasonably clean as these locations tend to target customers ying
into the airport. While to a certain extent the airport locations would be competing
with outlets in downtowns or other city locations that we do not consider, the market
denition is signicantly cleaner than previous applications, for example, in retailing or
banking industries. Finally, the price information in this industry is also reasonably easy
to collect and compare across rms and markets as these are single product rms with
car rental being the primary business. However, we should point out that these rms
also generate revenues by providing ancillary products and services such as supplemental
equipment (child seats, ski racks, cellular phones, navigation systems), insurance, and
gasoline payment options, for which we do not have any information. Nevertheless, the
problem is not as severe as with multi-product operations such as supermarkets and
hospitals.
Our data collection strategy relies on a variety of sources. First, we use the list of
commercial airports provided by the Federal Aviation Administration (FAA). This list
consists of the airport codes, full names, and addresses (city, state, and Zip codes) for
all commercial airports in the country including Alaska and Hawaii. For each of these
airports we use the aviation data provided by the Bureau of Transportation Statistics
to collect information on the air trac variables. These include measures on the total
number of passengers as well as information on number of major airlines ying into the
airport. Finally, the airport addresses were used to collect information on various demand
and cost factors using data from the Census and the Bureau of Labor Statistics (BLS).
The full list of variables describing each airport is provided in Table 2. The rst
set includes the standard variables capturing the demand (e.g. population, income) and
cost (rent, wages) conditions in a market. The next three variables capture the airline
trac ow at the airports. The variable Trac 2004 is the total number of passengers
ying into the airport in the year 2004, while Major Airline and Destination are the
13
number of major airlines serving the airport and the total number of direct destinations
that are connected through the airport. Since the primary clientele for car rentals at
the airport locations tend to be passengers ying into the airport we expect these airline
trac variables to play a major role in determining the number of car rental rms that
operate. The variable Number of HQ is the number of large corporations that have
their head quarters located in the market while the variable Pub Ratio is the percentage
of population in the market that uses public transportation to work. This variable serves
as the proxy for public transportation infrastructure in a market that can be thought as
a substitute for renting cars. Finally, Holiday represents holiday airports such as Miami,
Las Vegas, and Atlantic City.
Our next major piece of data includes the number and identities of all car rental
companies that are observed to operate at each airport. We collected this information
from Orbitz and Expedia websites as well as information from individual rms. In Table
3 we report the observed market structure in this industry along with a distribution of
airport trac for each market structure. We use a total of 458 airports in the analysis
and exclude airports from Alaska and an additional 9 markets with missing variables. As
can been seen from Table 3, we observe a wide range of market structure in this industry
ranging from over 130 airports with either a monopoly or duopoly to over a hundred very
competitive markets with eight or more rms. We can also observe that the number of
rms increase with demand, as measured by the airport trac. In the empirical section
below, we will use the airport trac to compute the entry thresholds, i.e., the minimum
demand required for an additional rm to enter the market.
The last piece of information in our database is the car daily rental prices at all the
airports. We collected this information for rental period starting on Monday, March 21,
2005 at 10 a.m and returning the car on Tuesday, March 22 at 10 a.m. This information
was collected exactly one week in advance on Monday, March 14, 2005 for all the markets.
We collected the price information on ve popular car types: Economy, Compact, Mid-
size, Standard, and Full-size and excluded special vehicles such as minivans and SUVs as
these tend to be available in only a few markets. In Figure 2 we display the distribution
of prices for each car type in concentrated (less than three rms) and competitive (seven
plus) markets. Two patterns are apparent from the distribution of prices shown in
Figure 2: the prices increase by car size from economy to full-size, and prices tend to fall
with competition. However, there seems to be wide dispersion in prices within market
structure suggesting the need for other control variables. We discuss these issues further
in the results section below.
14
4 Results
We now present the results from the model and data discussed above. We rst provide
estimates from the rst stage entry model, followed by price regressions and discuss the
implications of the bias when treating market structure variables as exogenous.
4.1 First Stage Entry Estimates
We rely on the variables outlined in the data section above to capture the factors im-
pacting rms entry decisions. Obviously, prots and entry costs at any airport location
depend on a large number of factors including agreements between car rental rms and
airport authorities through negotiations and/or bidding processes. These agreements
provide for concession payments based upon a specied percentage of revenue generated
at the airport, subject to a minimum annual fee, and often include xed rent for terminal
counters or other leased properties and facilities. Unfortunately, we do not observe many
of these factors and rely primarily on observed market characteristics.
We estimate two alternate models to describe the factors impacting rms entry deci-
sions. In addition to the variant of Berry (1992) described in the model sections, we also
estimate a model proposed by BR (1991) who specify a simple yet exible prot function
that governs rm behavior in a symmetric equilibrium. In BRs framework, that authors
assume that a representative rms prots can be specied as follows:

N
m
= V
N
(X
m
, , ) S (Y
m
, ) F
N
(W
m
, ) +
m
(14)
=
N
m
+
m
,
where
N
m
is a rms latent prot of entering market m when there are N rms in the
market. This prot function has three components: V
N
(X
m
, , ) is the variable prot
from serving a representative consumer, S (Y
m
, ) is a function that captures the size
of the market, and F
N
(W
m
, ) represent the xed cost of entry. (, , , ) are the
parameters to be estimated. Finally,
m
summarizes the unobserved characteristics and
is assumed to be independent normally distributed across markets.
In BR (1991), the market size S (Y
m
, ) is captured using the population in the market
or some function to include population in neighboring markets. Since our application is
to car rental companies operating at the airports, our empirical application also includes
measures on airport trac such as the total number of passengers ying into the airport.
The variable prot V
N
(X
m
, , ) is modeled as a function of N (the number of competi-
tors in the market) and X
m
that represent the exogenous demand and cost shifter that
15
impact variable prots:
V
N
(X
m
, ) =
1
+X
m

N

n=2

n
,
n
0 for n = 2, ..., N. (15)
Note that under this specication, the variable prots decrease as more rms enter
the market. The exogenous factors inuencing variable prots include variables such as
income and wages in the market. Finally, the xed costs are expressed as
F
N
(W
m
, ) = W
m

W
+
1
+
N

n=2

n
,
n
0 for n = 2, ...N. (16)
where in our empirical application W
m
includes a measure of real estate prices and
regional dummies that capture any systematic dierences in xed costs across airports
in dierent regions. Under the model specication above, the variable prots and xed
costs for a monopolist are
1
+X
m
and
1
+W
m

W
respectively.
The left panel of Table 4 presents the parameter estimates based on the model as
outlined above. Most of the parameter estimates seem reasonable and in the correct
direction. The protability of a market is increasing in the number of headquarters of
large companies, suggesting that the presence of headquarters captures attractiveness of
market conditions beyond those captured by local demographic characteristics. Retail
wages and the convenience of public transportation have negative impact, which is in-
tuitive as good public transportation infrastructure can be thought of as a substitute
for renting cars. The positive coecient for Holiday dummy suggests that protability
is signicantly higher in holiday markets. Estimates of the competition eects indicate
that the number of rivals in the market is an important determinant of protability, as
entry by additional competitors reduces prots signicantly except when the market is
already competitive (entry by the eighth rm is found to be insignicant). In relative
terms, magnitude of the impact is found to be higher with entry of the second and the
third player.
To capture market size, we use information annual airport trac, population in the
market that the airport is located and population growth rate in the market. For model
identication, the coecient of airport trac is normalized to one. The local population
has a small but statistically signicant impact on demand, whereas population growth
rate is found to be insignicant. For capturing the xed costs of entry we use real estate
prices in the market and regional dummies that capture any systematic dierences in
xed costs across airports in dierent parts of the country. Fixed costs are increasing
16
with real estate cost, and given the same market characteristics, are lowest in airports in
South. Fixed costs are also found to be increasing with entry of additional competitors.
The right panel of Table 4 shows the results form entry model discussed in the model
section. The results are more or less consistent with those presented above. Airport
trac and population have a positive impact on prots while the prots go down with
higher retail wages and real estate prices. In addition, prots are higher in holiday
markets as well as markets with headquarters for large rms, while markets with better
infrastructure of public transportation have lower prots. Looking at the competitive
eects we nd that additional entrant lower prots and the impact is highest with the
second entrant.
The parameter estimates can be used to derive entry thresholds, dened by BR(1991)
as the minimum market size required to support a given number of rms. The entry
thresholds for a market with N rms is calculated as follows:
S
N
=
F
N
_
W
m
,

_
V
N
_
X
m
, ,

_,
where
_
,

,

_
are parameter estimates from the model and W
m
and X
m
are factors
that inuence rms xed cost and variable prot respectively. The per rm break even
market size, s
N
is simply
1
N
S
N
. The ratio of these thresholds can provide insights on the
toughness of competition with additional entry. For example, if the breakeven thresholds
increase disproportionately with additional rms it can be interpreted as evidence of
price-cost margins declining with entry since with constant margins, a market would only
need to double to support another rm. With declining margins, the per rm break even
market sizes will increase with entry of additional rms. We plot the entry thresholds for
our data in Figure 3. To make the interpretation easier, the numbers are calculated for
each market conguration by ignoring the negligible inuence of population i.e., market
size is a function of airport trac only
6
. Figure 3 presents the estimated entry thresholds
where we observe that the ratio of entry thresholds is greater than 1 and that the entry
by second and third rm increases the intensity of competition substantially.
4.2 Price Regressions
The rst-stage entry estimates, while interesting on their own, mainly serve as a tool for
correcting potential endogeneity in the price regression. Our primary objective in the
6
All other covariates are set at their sample means.
17
paper is to study the relationship between prices and market structure. Our data includes
the prices oered by every rm for ve car types: Economy, Compact, Mid, Standard
and Full size. In what follows we pool the data across all rms and car types and regress
log of prices against rm and car type xed eects, other market specic covariates, and
market structure variables. To capture the competitive structure in a market we use two
specication: (1) Total number of rms, (2) An indicator variable for monopoly, duopoly,
and so on.
The results from the regression are reported in Table 5. The unit of analysis in these
regression is each rm-size and the observations are weighted to avoid overemphasizing
markets with large number of rms. In particular, each observation receives as weight
of inverse of the total number of rms in the market. We use seven market specic
covariates: log(Airport Trac), PopulationD (population density in the market), Retail
Wages, Pub Ratio (% of population that uses public transportation to work), Num HQ
(number of Head Quarters for major rms in the market), Poverty (measure of income)
and an indicator variable for holiday destinations. Note that the airport trac in the
price regression is the total number of passengers ying into the airport in the month of
March 2005, the month our price data is collected, and not the annual airport trac in
2004 as used in the rst-stage model.
The left panel in Table 5 shows the results from the models that ignore the endogene-
ity of market structure variables. The rst specication uses the total number of rms
in the market to capture the competitive structure while the second uses a more exible
indicator variable specication to capture the nonlinearities in the relationship between
price and number of rms in the market. The control variables generally have the ex-
pected sign with the exception of Num HQ. Prices tend to be higher in markets with
larger trac, higher population density, higher retail wages, and holiday destinations,
while markets with lower income levels and better public transportation infrastructure
tend to have lower prices. The variable In-Terminal is an indicator variable that takes a
value 1 if the car is oered inside the airport terminal. The parameter estimate shows
that the prices are approximately 10% higher for such convenience. In terms of car-type,
the parameters are of expected sign with economy cars approximately 13% cheaper and
full-size cars 12% more expensive compared to mid-size. Finally, the regional indicator
variables suggest that prices are highest in airports on the East cost and cheapest in Mid-
West. Turning to the more interesting parameters capturing the competitive structure,
results from the rst column indicate that adding an equivalent of one additional rm
at the airport reduces the price by approximately 2.3%. Column 2 uses a more exible
18
specication and shows that monopoly markets have prices that are approximately 16%
higher compared to highly competitive markets with eight rms.
The right panel in Table 5 shows the regression results after inserting the term that
corrects for endogeneity of market structure. The last row in columns 3 & 4 shows the
estimated parameter that represents the correlation between the unobservables that aect
the prices and the payo functions underlying rms entry decisions. The parameter
is similar in magnitude in both columns and is precisely estimated. The estimate is
positive suggesting the unobserved factors aect both observed prices and probability
of rm entry in same fashion. Recall from our discussion in Section 2.3 that a positive
coecient will result in underestimating the competition parameters. Comparing the
control variables across the models that correct for this endogeneity and the models in
columns 1 & 2, we nd that the parameters for some of the market specic variables
change somewhat while there is virtually no change in the In-Terminal or car-type xed
eects. The biggest change however is in the parameters of primary interest, i.e. those
capturing the competitive interactions. In particular, looking the # of rms parameter
in Model 3 we nd that the impact of an additional entrant in the market is almost twice
that suggested by Model 1. A similar picture appears when using a dummy variable
specication. For instance, the monopoly prices are found to be 38% higher compared
to the base of eight rm oligopoly versus 16% as suggested by Model 2.
In Table 6 we present the results that use Berrys (1992) entry model to derive the
correction terms. The results are quite similar to those presented in Table 5. The para-
meter estimates for the control variables have the same sign and are similar in magnitude
to those reported in the right hand panel of Table 5 (estimates after correction). More
importantly, parameter representing the correlation between the unobservables that af-
fect the prices and the payo functions is found to positive suggesting the unobserved
factors aect both observed prices and probability of rm entry in same fashion. The
competitive interaction parameters after correction are remarkable similar under the two
specication of the rm entry model. For instance, when the competition is measured by
the total number of rms, the coecient is -0.041 compared to -0.043 in Table 5. Sim-
ilarly, the competitive parameters are signicantly larger when using a dummy variable
specication compared to estimates without correction, and are similar in magnitude
under both specication for the underlying entry model.
Overall, our results show a signicant bias in the competitive interaction parameters
from the models that treats the market structure variables as exogenous. Results are
similar to those reported by Evans, Foreb and Werden (1993) who nd bias in the OLS
19
parameters in the magnitude of 150 to 250 percent. The magnitude of bias in OLS
regressions can be quite important since, as discussed in the introduction, such price
regressions are often used by FTC to predict price and welfare eects of mergers. Our
results show that price implications for such mergers can be severely biased. For example,
according to the regression estimates, a merger that changes a duopoly market to a
monopoly would result in prices that are approximately 5% higher compared to negligible
1% as predicted by the model without correction.
In closing we should also point out that the two-stage estimation procedure outlined in
the paper can also be useful in making predictions due to changes in exogenous variables.
Consider for instance change in prices due to a exogenous change in airport trac.
According to the price regressions, the coecient of trac is positive indicating that an
increase in demand will result in higher prices. However, it is important to understand
source of increase in trac: whether it is short term demand shock or a long term change
of market condition. If it is a short term event, e.g., a sports competition that attracts
a lot of travellers to the airport, then we expect prices go up due to higher demand.
However, if the higher trac is driven by a long term factor, such as a new resort,
then the answer becomes subtle. In particular, according the parameter estimates from
the entry model, a permanent increase in trac (which is an important determinant of
number of rms) may induce additional competitors to enter the market leading to lower
prices.
5 Conclusion
A long stream of literature in economics and marketing strategy examines the relation-
ship between market structure and outcomes such as prices, revenues, and prots. In
the structure-conduct-performance paradigm of industrial organization, this literature
relies on cross-sectional data across industries or local markets within an industry to
document the impact of market concentration on these outcome variables. However, the
price-concentration regressions such as those used in the literature suer from serious
endogeneity issues since there are likely to be unobserved demand and cost shocks in a
market that not only inuence prices but also the underlying market structure. In this
paper we investigate the relationship between price and number of rms in the auto rental
industry. We develop an original data set that includes the number of car rental rms
at every commercial airport in the United States. For each of these markets we collect
an extensive set of variables that capture the demand and cost conditions. In addition
20
we collect data on daily rental prices from every rm and for each car type. Using this
data, we test how the prices change with the number of competitors in the market.
Our modeling approach takes into account the endogeneity of market structure in the
price regression by using a two-stage estimation procedure to address the endogeneity of
market structure. In the rst stage, we estimate an equilibrium model of entry that pre-
dicts the number of competing rms in a market. The parameter estimates from the rst
stage entry model are then used to derive correction terms that are inserted in the price
equation to correct for the correlation between the price errors and the market struc-
ture variables. We nd that concentrated markets (those with fewer than three rms)
have prices that are approximately 30-35% higher than competitive markets (with more
than seven rms). More importantly, we nd that ignoring the endogeneity of market
structure in the price regressions severely underestimates the competition parameters,
and the competitive interaction parameters are double in magnitude once we insert the
correction terms in the price regression.
There are of course several caveats to our analysis and directions for future research.
Foremost, the validity of correction in the price regressions depends on the correct spec-
ication of the rst-stage entry model. In this paper we used the models proposed by
BR and Berry (1992) and found similar results. Depending on the specic application,
models used in Mazzeo (2001) for discrete heterogeneity, Seim (2005) for rm location
and Zhu et al. (2005) that allow for rm identities can be considered. All these papers
analyze the underlying market structure variables by have limited or no information on
price, quantity, and costs. In the marketing literature, recent structural work has exam-
ined issues such as brand value creation and competitive advantage (Besanko et al. 1998),
product line competition (Kadiyali et al. 1999, Draganska and Jain 2005), channel power
(Kadiyali et al. 2000), retailer pricing (Sudhir 2001, Chintagunta 2002), and price dis-
crimination (Besanko et al. 2003, Chintagunta et al. 2003, Khan and Jain 2004). These
papers use variants of the methods proposed in Berry, Levinsohn, and Pakes (1995) and
Nevo (2001) and have detailed information (primarily from scanner data) on price and
quantity (and sometimes costs). However, they treat the market structure variables as
exogenous. With availability of long panel datasets with sucient variation in number of
competitors, it would be interesting to combine these two steam of literatures in future
work.
21
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Shares panel.
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25
Table 1: Comparison of Oce Depots Advertised Prices
Cover Page of January 1997 Local Sunday Paper Supplement
Orlando, Fl. Leesburg, Fl. Percent
(3 rms) (Depot only) Dierence
Copy Paper $17.99 $24.99 39%
Envelopes $2.79 $4.79 72%
Binders $1.72 $2.99 74%
File Folders $1.95 $4.17 114%
Uniball Pens $5.75 $7.49 30%
Table 2: Summary Statistics
Variables Mean Std Dev
Population 412269.97 966758.39
Pop Change Rate 0.14 0.16
Poverty Ratio 0.13 0.05
Housing Value 79350 49777
Retail Wage 21800.54 3211.57
Trac 2004 1267136.46 3633197.91
Major Airline 2.37 3.12
Destination 43.73 53.50
Number of HQ 6.69 19.53
Pub Ratio 0.02 0.05
Holiday 0.09 0.29
26
Table 3: Market Structure and Airport Trac
Market Strucutre N 5th Ptcl 25th Pctl Median Mean 75th Pctl 95th Pctl
No Firms 19 393 797 2,128 2,637 2,859 9,879
Monopoly 68 1,198 2,250 4,376 6,401 7,336 16,248
Duopoly 66 1,707 3,946 7,137 16,927 15,031 60,954
Oligopoly-3 49 2,548 17,896 24,986 38,656 43,857 120,715
Oligopoly-4 33 6,202 24,113 42,826 60,582 74,987 142,379
Oligopoly-5 33 3,052 44,563 89,618 146,821 222,200 468,020
Oligopoly-6 49 35,837 142,183 222,797 731,332 387,507 2,033,441
Oligopoly-7 37 60,929 171,211 301,726 702,145 650,208 1,236,778
Oligopoly-8 53 254,404 555,223 1,235,494 2,747,626 3,898,859 10,030,133
Oligopoly-9+ 51 359,594 2,556,379 4,315,597 7,619,785 10,999,813 23,575,604
27
Table 4: Parameter Estimates from Entry Model
Without Heterogeneity With Heterogeneity
Variable Estimate Std. Error Variable Parameter Est Std. Err
Variable Prot
Number of HQ 0.041 0.020 Num of HQ 0.2284 0.0538
Holiday 0.081 0.027 Holiday 1.2362 0.2162
Retail wage -0.040 0.009 Retail wage -0.1462 0.0756
Poverty 0.008 0.018 Poverty -0.0344 0.0539
Pub Ratio -0.037 0.008 Pub Ratio -0.3812 0.1101

1
21.319 0.378 Trac 2.1047 0.1189

2
13.848 0.833 Population Growth 0.0866 0.0633

3
4.905 1.230 Population 0.1579 0.0336

4
0.922 0.348 Housing Unit Value -0.2315 0.0957

5
0.682 0.195 Mid-west -0.1133 0.1015

6
0.349 0.116 South 0.5156 0.1025

7
0.390 0.067 West 0.3335 0.1027

8
0.014 0.013 0.5364 0.0907
a1 1.4303 0.085
Market Size a2 2.3348 0.0947
Population Growth 0.009 0.009 a3 0.2161 0.1562
Population(in 10,000) 0.018 0.008 a4 0.7506 0.1741
Trac(in 10,000) 1 na a5 0.3825 0.1577
Fixed Cost a6 1.9938 0.2759
Housing Unit Value 0.179 0.067 a7 1.0235 0.3583
Mid-west 0.080 0.184 a8 0.3055 0.5592
South -0.481 0.183
West -0.202 0.178

1
0.252 0.276

2
0.412 0.207

3
0.274 0.144

4
0.288 0.108

5
0.094 0.090

6
0.181 0.079

7
0.079 0.091

8
0.565 0.116
Log Likelihood -601.715 Objective function 732.19
28
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29
Table 6: Parameter Estimates from Price Regression (Berry)
With Correction Using Berrys (1992) Entry Model
Variable Parameter Est Std. Err Parameter Est Std. Err
Intercept 3.6577 0.0253 3.2595 0.0511
Log(March Trac) 0.0542 0.0038 0.0583 0.0041
PopulationD 0.5122 0.0757 0.5591 0.0780
Retail Wages 0.9551 0.4845 0.9943 0.4838
Pub Ratio -0.0570 0.0082 -0.0617 0.0083
Num of HQ -0.0823 0.0344 -0.0851 0.0346
Poverty Ratio -0.0060 0.0036 -0.0052 0.0036
Holiday 0.1292 0.0141 0.1381 0.0144
In-Terminal 0.1013 0.0089 0.0984 0.0090
Economy -0.1370 0.0088 -0.1377 0.0088
Compact -0.0954 0.0085 -0.0960 0.0085
Standard 0.0864 0.0088 0.0861 0.0088
Full Size 0.1171 0.0084 0.1171 0.0084
Midwest -0.0843 0.0097 -0.0873 0.0097
South -0.0335 0.0095 -0.0333 0.0095
West -0.0286 0.0095 -0.0299 0.0095
N OF FIRMS -0.0410 0.0032 na na
Monopoly na na 0.3054 0.0257
Duopoly na na 0.2846 0.0245
Oligopoly-3 na na 0.2635 0.0213
Oligopoly-4 na na 0.2239 0.0205
Oligopoly-5 na na 0.1950 0.0182
Oligopoly-6 na na 0.1123 0.0145
Oligopoly-7 na na 0.0450 0.0139
Error Correction 0.0597 0.0075 0.0712 0.0082
30
Price
1, 1
m
N = =
1, 0
m
N = =
1, 0
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N = =
2, 0
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N = =

B
C
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L H
Price
1, 0
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N = =
2, 0
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N = =

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C
B
1, 0
m
N = =

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N = =
<0
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Traffic
L H
Figure 1: Illustration of Estimation Bias
31
0 20 40 60 80 100 120
0
5
10
15
20
25
30
Price(Mean=51.99 Std=15.62)
F
r
e
q
u
e
n
c
y
Price Distribution of EconomySized Cars in Concentrated Markets
0 20 40 60 80 100 120
0
10
20
30
40
50
60
70
80
90
Price(Mean=47.05 Std=14.39)
F
r
e
q
u
e
n
c
y
Price Distribution of EconomySized Cars in Competitive Markets
0 20 40 60 80 100 120
0
10
20
30
40
50
60
Price(Mean=53.56 Std=14.19)
F
r
e
q
u
e
n
c
y
Price Distribution of CompactSized Cars in Concentrated Markets
0 20 40 60 80 100 120
0
10
20
30
40
50
60
70
80
90
Price(Mean=49.16 Std=14.73)
F
r
e
q
u
e
n
c
y
Price Distribution of CompactSized Cars in Competitive Markets
0 20 40 60 80 100 120
0
5
10
15
20
25
30
35
40
45
50
Price(Mean=57.62 Std=14.27)
F
r
e
q
u
e
n
c
y
Price Distribution of MidSized Cars in Concentrated Markets
0 20 40 60 80 100 120
0
10
20
30
40
50
60
70
80
90
Price(Mean=55.37 Std=15.76)
F
r
e
q
u
e
n
c
y
Price Distribution of MidSized Cars in Competitive Markets
0 20 40 60 80 100 120
0
5
10
15
20
25
30
35
Price(Mean=61.65 Std=15.82)
F
r
e
q
u
e
n
c
y
Price Distribution of StandardSized Cars in Concentrated Markets
0 20 40 60 80 100 120
0
10
20
30
40
50
60
70
80
Price(Mean=60.37 Std=15.91)
F
r
e
q
u
e
n
c
y
Price Distribution of StandardSized Cars in Competitive Markets
0 20 40 60 80 100 120
0
5
10
15
20
25
30
35
40
45
50
Price(Mean=63.78 Std=14.42)
F
r
e
q
u
e
n
c
y
Price Distribution of FullSized Cars in Concentrated Markets
0 20 40 60 80 100 120
0
10
20
30
40
50
60
70
80
Price(Mean=60.86 Std=16.08)
F
r
e
q
u
e
n
c
y
Price Distribution of FullSized Cars in Competitive Markets
Figure 2: Distribution of Auto Rental Prices
32
10
3
10
4
10
5
10
6
0
1
2
3
4
5
6
7
8
9
Traffic (log scale)
N
u
m
b
e
r

o
f

F
i
r
m
s
1181
8879
36516
74527
137153
244978
710436
1028044
Figure 3: Entry Thresholds based on the Parameter Estimates of Entry Model
33