Sequential Supply Decision and Market Efficiency: Theory and Evidence

In a homogeneous goods market, due to the lack of the preemption effect, each firmi?½s demand is likely to be proportional to its share of total output. Firms are inclined to supply more to increase their market shares, but should also consider the potential cost from excess supply. Thus, firms should make strategic decisions on how much to supply. We study this topic by considering an oligopoly market in which firms make decisions sequentially under a fixed price. We first provide a theoretical model and find the conditions under which either an efficient supply or oversupply occurs. Our model proposes two practical ways to evaluate the efficiency of a market, specifically regarding excess supply, that do not require information about market demand. Using these, we evaluate the efficiency of the Korean movie theater industry. Our empirical findings indicate oversupply of seating capacity in that industry.