Market Structure and Economic Performance in the United Kingdom

Abstract

Is there a relationship between market structure and economic performance in the United Kingdom? Traditional theory suggests that monopolies and oligopolies tend to have higher profits and prices than competitive industries, ceteris paribus. If this were true, there would be an important maldistribution of resources. The macroeconomic implications could be even more important; to what extent have the price policies pursued by oligopolistic industries contributed to the rate of inflation? Gardiner Means [I I] argued that firms with 'administered prices', identified as those clearly enjoying some degree of monopoly power, were primarily responsible for the inflation of the I950S in the United States because they raised prices despite the recession in an attempt to increase profit margins. This assertion rested primarily on an intensive study of particular industries with clear-cut market power (such as the steel industry). It was supported by further studies, summarized by Blair [i], which found significant differences between the pricing conduct of such industries and that of more competitive industries where prices were 'market determined'. Other research workers have looked for a positive general association between market structure and price changes across all manufacturing industries. This general relationship has been cast aside as a 'straw man', a misinterpretation of Mean's original 'administered price thesis'. We are inclined to agree with Blair's argument that 'there is no conceptual reason why price behaviour should differ significantly among unconcentrated industries that differ only in the extent to which they are unconcentrated' because in such industries the leading producers do not have discretionary control over prices. Formally, this is tantamount to specifying that a threshold level of concentration must be reached before we can expect to observe a relationship between price increases and concentration. The implied non-linearity of the relationship between market structure and performance is plausible, but the precise theoretical form of this nonlinearity has not yet been derived. Indeed, the economic theory underpinning