The Concept and Measurement of Permanent Industrial Concentration

Abstract

The underlying thesis of this paper is that static measures of concentration cannot by themselves indicate the degree of monopoly power in an industry or market. The argument behind this view is that the monopoly power of the large firms ultimately depends on their ability to inhibit entry and the growth of smaller firms. No static measure of concentration can reflect this ability because it can only be measured over a period of time. The main part of the paper is concerned with developing and interpreting new measures that would incorporate within them the power, or lack of power, of the large firms to inhibit entry and the growth of smaller firms. In developing these measures, the starting point is the work of Friedman and Kuznets in measuring the permanent component of an income distribution. The market shares of the firms are divided into permanent and transitory components, and the paper shows that by comparison of observed market shares for two different periods of time it is possible to infer measures of concentration that are based upon the permanent component of the shares. These measures of permanent concentration incorporate within them the ability of the large firms to inhibit entry and the growth of smaller firms.