The number of firms and production capacity in relation to market size

Many oligopoly theories predict a positive correlation between market size and the equilibrium number of firms and some also imply that competition is more intense in larger markets. We test these predictions on a sample of d riving schools in 250 Swedish regional markets by estimating the relation b etween the number of firms, production capacity, and market size. The numbe r of firms increases less than proportionally with market size. Market size per capacity unit is smaller in large markets. Since firms produce a fairl y homogenous good, we argue that this is evidence that profits per capita i s decreasing in market size.