Hunting for a Bogeyman? In Search of Statistical Evidence of Direct Competition between Firms

Abstract

Although inter-firm competition is frequently mentioned in industrial organization discussions, it has received limited empirical support. Recently, however, Sutton (2007) has shown that the growth rates of the largest and second largest firms in an industry are essentially statistically independent. This seems incompatible with claims of intense inter-firm competition. We begin by computing correlation coefficients for the growth profiles of firms, but the highest correlation coefficients appear to have random rather than economic explanations. We then present scatterplots of the growth rates of the largest vs. second largest firms in specific industries, but observe that the growth dynamics of these firms are largely independent. Finally, for each industry we calculate a correlation coefficient between the annual growth rates of the two largest firms over 9 years, and observe a bimodal shape in the distribution of these correlation coefficients (one positive mode and one negative mode). This suggests that firms either share common fates (positive correlation), or experience different fates (negative correlation).