Specifying the Dynamics of Industry Concentration

Abstract

Previous studies generally explain changes in concentration by its initial determinants or by changes in its determinants. Little attention is paid to the dynamic structure of the model. This study provides a framework to sort out adjustment effects in a systematic manner. The empirical model distinguishes from short-term effects and estimates the rate of adjustment when concentration deviates from its level. CONSIDERABLE attention has focused on industry concentration a key element of market structure. While earlier empirical studies examined determinants of the level of industry concentration, a more recent literature focuses on changes in concentration.' These more recent papers typically explain intertemporal changes in concentration by the past levels of industry growth, concentration, advertising intensity and minimum efficient plant size. However, the dynamic relationship between changes in concentration and the levels of the independent variables has not been explicitly specified. Caves and Porter [1980] have argued that explaining changes in concentration by past levels of market structure variables is tantamount to assuming that the sampled industries are in the process of adjusting to a disequilibrium situation. As an alternative, they adopt a long-term equilibrium approach, whereby changes in concentration are explained by lagged changes in the relevant market conditions. They find that this approach as a whole was unsuccessful, exhibiting low levels of significance and a lack of robustness when the cross-section regressions were shifted to different time periods