BPEA | 1990: Microeconomics

The Concentration-Margins Relationship Reconsidered

Microeconomics 1990

THIS PAPER DISCUSSES an old and much-maligned topic: the cross-sectional
relationship between the concentration of firms in the marketplace and
price-cost margins. Because it is hard to imagine a literature for which
modern graduate students in economics are taught to have more contempt,
some immediate justifications are in order. I have two. First,
despite the well-known problems with this literature, it continues to
affect antitrust policy. The inappropriate inferences used to justify an
active antitrust policy have given way to equally incorrect inferences
that have been used to justify a relaxed merger policy. Second, the
alternative to cross-industry studies is to study specific industries. Indeed,
the econometric analysis of individual industries has been labeled
the “new empirical industrial organization.” Although this development
is a healthy one, it is important to recall that it was the failure of
studies of individual industries to yield general insights that made crossindustry
studies popular. One might argue that the primary lesson from
three decades of cross-sectional studies is that general principles based
on simple indicators are not to be had. Nevertheless, the imprecisions in single-industry studies make it useful to have some benchmark against
which to judge the results.