The Profitability-Concentration Relation: Market Power or Efficiency?

Wholesale pricing in a small open economy

“…This problem is solved by scaling the range of possible outcomes of the (Herfindahl) concentration measure (of which the lower bound depends on the number of firms within the industry) between zero and one. Fourthly, in accordance with Stigler's (1964) market-power hypothesis, the effectiveness of collusion is likely to be greater when industries become increasingly concentrated suggesting a nonlinear, progressive, relationship between concentration and performance (cf Collins and Preston, 1966; and formal derivations by Cowling and Waterson, 1976;Geroski, 1981;Clarke et al, 1984;and St~lhammer, 1991). In the present study this non-linearity is accounted for by dividing the concentration measure by one minus itself.…”

Do Unions Capture Monopoly Profits?

“…It is certainly clear that in our data set industry concentration is, if anything, negatively associated with profitability. Also, we are hardly alone in finding the link between profitability and concentration a weak one (Ravenscraft 1983;Bothwell, Cooley, and Hall 1984;Connolly and Hirschey 1985;Mueller 1986); and even where stronger evidence is found, the interpretation of this relationship is not straightforward (Demsetz 1973;Clarke, Davies, and Waterson 1984). In short, the conclusion that unions capture monopoly profits associated with concentration assumes that concentration produces monopoly profits to capture, and the evidence for that assumption is shaky at best.…”

Trade Liberalization and the Politics of Financial Development

“…The measure has been shown to be strongly positively correlated with measures of concentration across industries (see for example Domowitz et al (1986), Collins and Preston (1969), Clarke et al (1984), and Encaoua and Jacquemin (1980)). This correlation is shown in Panel B, which plots the average PCM across U.S. manufacturing industries against the C-4 concentration ratio (the sales of the four largest firms in an industry to total industry sales) 7 .…”