Determinants of Market Structure

Abstract

Most empirical research in industrial organization has taken market structure as given and related structural variables to various aspects of performance [15]. In addition to the effects of structure on performance, there are, however, likely to be important feedback effects of performance on structure. Thus, a complete analysis of performance should be based on a fundamental analysis of the determinants of market structure-the central goal of this paper. Previous studies have typically collapsed market structure variables into a summary measure, the four-firm concentration ratio. Some studies have sought to explain differential concentration across industries, while others have analyzed changes in concentration over time. The two should be related since, if a set of variables explains a high percentage of variation in differential concentration, the time rate of change of these variables should also explain changes in concentration over time, and conversely. This paper focuses on differential concentration. In prior studies differential concentration has been shown to be inversely related to market size, number of firms, and relative industry size, but positively related to average firm size, capital intensity, and entry capital requirements [1; 7; 11; 12; 13; 14]. Advertising has also been related to concentration with conflicting results [3; 4; 8; 17]. This