The Causes and Consequences of Rising Industrial Concentration

Abstract

IN the October 1977 Journal of Law and Economics, Professor Sam Peltzman concludes from a statistical analysis covering 165 manufacturing industries that increases in concentration between 1947 and 1967 brought unit cost reductions far outweighing the price-raising effects associated with enhanced monopoly power.' Underlying these relationships, he argues, is a particular set of historical dynamics. The process begins when some representative firm finds a way to reduce unit costs significantly. It and early imitators grow rapidly, increasing their combined market share and hence the total share of industry output benefiting from the new, lower-cost method. The greater the initial unit cost reduction, the more rapidly the innovators' market shares and hence industry concentration rise; and the more rapidly concentration rises, the more pervasive the cost reductions will be, leading to larger observed declines in average industry-wide costs per unit.