Organizational Costs, "Sticky Equilibria," and Critical Levels of Concentration

Abstract

JN the thirty years since Joe Bain's seminal I study (1951), many economists have attempted to determine whether or not there exists a critical level of market concentration at which a discontinuity occurs in the relation between industry concentration and profitability. In this paper we develop and test a more general model, based on organizational costs, which posits the existence of two critical levels of market concentration: one at which an existing cooperative equilibrium will break down as concentration declines, and one at which a cooperative equilibrium will become attainable as concentration increases. We show that the standard model of the critical level of concentration can be regarded as a special case of our more general model, and also that the more general model attains a statistically superior fit. In section II we briefly review some of the previous literature in this area. We develop our model in section III and specify and estimate it in sections IV and V. In sections VI and VII we summarize and interpret our results and present some policy implications of our findings.