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.