When Demand Increases Cause Shakeouts

Thomas N. Hubbard, Michael J. Mazzeo

NBER Working Paper No. 23639
Issued in July 2017
NBER Program(s):Industrial Organization

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.

download in pdf format
   (1151 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w23639

Published: Thomas N. Hubbard & Michael J. Mazzeo, 2019. "When Demand Increases Cause Shakeouts," American Economic Journal: Microeconomics, vol 11(4), pages 216-249.

Users who downloaded this paper also downloaded* these:
Burger, Warnock, and Warnock w23628 The Effects of U.S. Monetary Policy on Emerging Market Economies' Sovereign and Corporate Bond Markets
Hansen, Miller, and Weber w23632 The Taxation of Recreational Marijuana: Evidence from Washington State
Bernstein, Lerner, and Mezzanotti w23626 Private Equity and Financial Fragility during the Crisis
Clark, Gill, Prowse, and Rush w23638 Using Goals to Motivate College Students: Theory and Evidence from Field Experiments
Berndt, Conti, and Murphy w23640 The Landscape of US Generic Prescription Drug Markets, 2004-2016
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us