Is There a Causal Effect of Concentration on Persistent Profitability Differentials?

Abstract

This article searches for a causal effect of industry concentration on estimates of persistent profitability differentials. I offer solutions to identification problems that plague related analyses by applying an IV and a natural experiment. This is the first study that explains estimates of persistent profit differentials using business segments data, allowing to match micro and industry level data more consistently. Testing linear relations, critical concentration levels and interactions with mobility barriers I find no evidence that concentration has any positive effect on long-run profitability differences. Results rather tend to point to a statistically and economically significant negative causal effect.