Competition for Scarce Resources

We show that the efficient allocation of production capacity can turn a competitive industry and downstream market into an imperfectly competitive one. Even though downstream firms have symmetric production technologies, the downstream industry structure will be symmetric only if capacity is sufficiently scarce. Otherwise it will be asymmetric, with one large “fat ” capacity-hoarding firm and a fringe of smaller “lean and fit ” firms, so that Tobin’s Q varies inversely with firm size. This is so even if the number of firms is infinitely large. As demand or input quantity varies, the industry may switch between symmetric and asymmetric phases, generating predictions for firm size and costs across the business cycle. Surprisingly, an increase in available capacity resulting in such a switch can cause a reduction in total output and consumer surplus.