Employer Discrimination and Market Structure

Abstract

We formalize Gary Becker's dynamic conjecture that competitive forces drive discriminating employers from the market in the long run, using a dynamic model of a monopolistically competitive industry characterized by sunk costs and sequential entry. An advantage of this formalization is that it demonstrates the importance of the structure of production costs, as well as market power, in explaining the long-run survival of discriminatory firms. In addition, we show that, despite decades of empirical research on this connection, there is actually no consistent theoretical relationship between the degree of market concentration within an industry and the degree of discrimination. However, we do find an indirect link in which market liberalization has a more pronounced effect in reducing discrimination in more concentrated markets.