Industrial Structure, Conduct and Performance: Evidence from Corporate Combinations

Abstract

In the literature of industrial organization, debate continues on the relationship between industrial structure on the one hand and competitive behavior and performance on the other. This debate is fueled by alternative explanations of the positive relationship between concentration and profitability observed in early research by Bain (1951, 1956) and subsequently by others. The original explanations were based on the view that concentration facilitates collusive behavior, and adherents to the Monopoly Power view naturally attributed the relationship to the existence of monopoly profits in concentrated industries. The counterargument proposed by Demsetz (1973) views concentration as the result of active competition by which firms are motivated to improve efficiency. In the presence of scale economies, larger firms are more efficient and, hence, more profitable than their smaller rivals. Since their larger market shares produce higher concentration, a positive relationship between industry concentration and profitability is observed. In the Efficient Structure (ES) view, concentration reflects intra‐industry efficiency differences; in the Monopoly Power (MP) view, concentration reflects collusive behavior. Importantly, the empirical distinction between these theories and, hence, their empirical validity as competing alternative hypotheses remains unclear.