Concentration-profits Relationship Research Articles

The Concentration-Profitability Relationship in Turkish Industry

The concept of industrial concentration refers to the control of a given industry by a small number of leading firms which are exclusively engaged in that industry. In economic theory concentration is an important concept to understand a departure away from competitive market structure which is accepted as a reference point for efficiency. Using the traditional structure-conduct-performance (SCP) paradigm many researchers found that the higher the level of concentration is the higher the level of profitability. In an earlier study I attempted to determine the level of concentration in the Turkish manufacturing industry for 84 sectors. In addition, I conducted a multiple regression analysis in various forms to identify the determinants of concentration and its effects on profitability. In most regression results, the relation between concentration and profitability was found positive and statistically significant. The present paper takes one step further and summarizes two new dimensions of industrial concentration. The first is to understand the current level of concentration for the Turkish manufacturing industry using a larger set of data. The new data set obtained from the TurkStat provides some basic statistics over the period 2009-2012 for 224 four-digit manufacturing industries. A brief analysis of the current data shows a slightly declining trend in the overall concentration ratio. CR4 (four-firm concentration ratio) fell from 51 to 49, CR8 (8-frim concentration ratio) fell from 61 to 60, and HHI (or H for short, Herfindahl-Hirschman index) dropped from 0. 173 (or from 1730) to 0. 153 (or to 1530). However a much bigger drop is observed for a longer period in the data coming from the top 500 industrial firms of ICC (Istanbul Chamber of Commerce). The latter data show a sharp fall in CR8 from 32 percent to 24 percent. These results together reflect a falling tendency in the dominant role of large firms in the Turkish economy which is a sign of increased level of competitive environment.

The Concentration-Profitability Relationship In American Industry: A Varying Parameters Model

<span>The theoretical foundation upon which the structure-conduct-performance paradigm is built assumes that concentrated markets permit noncompetitive behavior on the part of the market participants permitting abnormal profits to accrue. Previous research examines this relationship in a variety of forms. In each case, no allowance is made for the relationship to change dependent upon the prevailing levels of economies of scale. This paper employs a varying-parameters model which relaxes the classes OLS assumption of constant coefficients for all sample observations. Instead, a factor-dependent, nonstocastic variable is incorporated which captures the manner in which concentration relates to profit margins based on measures of economies of scale The results show that while market concentration is associated with profit, the nature of the relationship varies with the prevailing scale economies. Scale economies prove effective based on the sample data in restraining noncompetitive behavior and limiting the ability of participating units to extract profits in excess of those witnessed in more competitive environments. This conclusion support the hypothesis that the use of scale measures as a varying parameter is suggested in any attempt to estimate the SCP relationship.</span>

Revisiting the Concentration-Profits Relationship in South Africa: Moving the Debate Beyond Deadlock

Having played out for nearly five decades, the concentration-profits controversy is perhaps one of the longest running debates in the field of Industrial Organisation. Sadly, the well worn path of cross section study has forced the debate into an impasse, unable to render clear or precise conclusions. However, we believe that cross section study can still yield important insights provided its purpose is not to validate the deterministic either/or stance endemic in the SCP paradigm/Chicago debate. By re-orientating the debate away from a search for sterile “laws” that supposedly govern whether concentration is a proxy indicator for monopoly abuse or the by-product of greater efficiency, the South African debate can escape the gridlock. In the first part, this study replicates the seminal works of Collins and Preston (1969), Comanor and Wilson (1967) and Weiss (1974). These studies are important because they provide a framework within which the interrelationships between a number of key variables - such as buyer concentration, regional concentration and various barriers to entry - are examined for the first time using South African data. This study shows that there is much richness in the complex array of structure and performance relationships that persist between key industry variables. The second half of the investigation probes further, testing a series of simultaneous equations to understand how endogeneity and simultaneity considerations might blur the expected lines of causality within the concentration-profits relationship. A number of key inferences are drawn, highlighting a number of surprising results.

Industry concentration-profitability relationship and competition policy: is there a critical concentration level?

The critical concentration hypothesis that there exists a threshold level of concentration which separates industries into two regimes in terms of profits has been tested empirically using the single-equation approach, ignoring the simultaneity involved in the determination of profits across industries. The majority of previous studies found supportive evidence for the hypothesis. This paper employs a simultaneous equation model to examine the concentration-profitability relationship and casts serious doubt on the existence of any such critical threshold.

Industrial relatedness, structural factors and bidder returns

The relationship between industry structure and performance has maintained a central role in UK, US and EC competition legislation. The potential for improved efficiency and the perceived threat to consumer interests are not necessarily irreconcilable. The structure—conduct—performance (SCP) paradigm predicts that the structure of the market in which a firm operates will determine its performance. One of the central propositions of this structuralist hypothesis is that findings of a positive relationship between seller concentration and average industry profitability is evidence of the exercise of market power. Competition policies based on this hypothesis are designed to prevent substantial increments to that power via horizontal mergers. The SCP paradigm is not, however, without its critics. An alternative view proposed by Demsetz results in a diametrically opposite recommendation for merger policy. Demsetz suggests that the concentration-profitability relationship, rather than highlighting the existenc...

Profits and "contestability": state-by-state evidence from banking markets

Contestability in local banking markets is tested using a structure-performance (S-P) model. OLS and TSLS tests using a 38 state sample of 5,396 banks in 1,474 markets reveal a positive concentration-profitability relationship. This implies that local banking markets are not contestable. However, tests for each state separately show that the S-P relationship exists only in approximately one-fifth of states. F-tests indicate that using a national pooled sample is inappropriate. The results suggest that market structure, including entry conditions, affect performance, consequently the theory of potential competition is more relevant than contestability theory. However, generalizations may be inaccurate.

The Search for a Critical Concentration Revisited

This paper examines the issue of whether there is a four-firm critical concentration ratio above which industries earn supranormal profits. A statistical test is employed to investigate the functional stability of the estimated relationship. Although the initial results indicate a range in the concentration ratio of between 0.48 and 0.55 over which the functional relationship destabilizes, additional analysis fails to identify a clear break in the concentration-profitability relationship. It can only be concluded that a critical concentration does not appear to exist.

Advertising as Information: An Empirical Note

Lamm, R. McFall, Unionism and Prices in the Food Retailing Industry, Journal of Labor Research 3 (Winter 1982), 69-79. Marion, Bruce W., Willard F. Mueller, Ronald W. Cotterill, Frederick E. Geithman, and John R. Schmelzer, Food Retailing Industrv': Market Structure, Profits, and Prices (New York: Praeger, 1979a). ______ The Price and Profit Performance of Leading Food Chains, A merican Journal of A gricultural Economics 61 (Aug. 1979b), 420-433. Salinger, Michael A., Tobin's q, Unionization, and the Concentration-Profits Relationship, Rand Journal of Economics 15 (Summer 1984), 159-170. Voos, Paula B., and Lawrence R. Mishel, Union Impact on Profits: Evidence from the Supermarket Industry, Working Paper No. 88, North Central Project 117, University of Wisconsin-Madison, Oct. 1985. The Union Impact on Profits: Evidence from Industry Price-Cost Margin Data, Journal of Labor Economics 4 (Jan. 1986), 105-133.

Intra-Industry Performance Comparison and Industrial Concentration

This study examines the importance of economies of scale in measuring the concentration-profits relationship. Firms are grouped into industries facilitating within industry analyses. Replacement cost disclosures are utilized to evaluate any price change bias resulting from the use of traditional accounting statements. This study produces no indication of economies of scale in high or low concentration industries. In medium concentration industries there is a weak tendency for larger firms to have higher returns. This result cannot, however, be attributed to scale economies. Observed replacement cost price adjustments are not randomly distributed across firms.

Testing the interaction between concentration and barriers to entry

Various functional forms are employed to examine the independent and interactive effects of seller concentration and entry conditions on profitability. Significant interactive effects appear. There is also some evidence of a critical concentration ratio, which affects the slope of the concentration-profitability relationship.

A note on dominant firm market share and economic performance

The hypothesis of a positive concentration-profits relationship has been one of the most thoroughly tested in economics. Market share has been used in a number of these studies as a measure of horizontal dominance by a firm in an industry. Although these studies have shown empirically that a positive relationship exists between market share and rates of return, little theoretical evidence for this relationship exists.

Tobin's q, Unionization, and the Concentration-Profits Relationship

This article uses Tobin's q, the ratio of the market value of a firm to the replacement value of its physical assets, to measure monopoly power and to examine the relationship between market structure and profitability. Tobin's q is a better measure of monopoly profits than indices of single-period profitability because it measures long-run monopoly power. In addition, it is subject to less measurement error and it contains an adjustment for risk. The relationship between q and long-run monopoly power is established. Provided that all inputs are supplied competitively, q should be highly sensitive to even small amounts of monopoly power. Since the level of q is generally not high in the American economy, the result suggests either that monopoly power is absent or that unions manage to capture monopoly rents. Empirical tests of the relationship between Tobin's q and measures of market structure and unionization provide evidence that unions do capture most monopoly rents.

Efficiency, Market Power, and Profitability in American Manufacturing

A significant, positive association between concentration and profitability is perhaps the most widely reported statistical relationship to be found in the literature of industrial organization [25]. According to conventional oligopoly theory, this reflects the ability of the leading firms in concentrated markets to collude tacitly or explicitly. Some economists, most notably Harold Demsetz [8;9] have challenged the conventional view. Demsetz argues that it is the superior efficiency of large firms which results in both high concentration and high profits. He supports this argument with evidence, replicated by Round [20] and Carter [4], that concentration increases the profits of large firms but not small firms. If the firms in an industry are equally efficient, effective collusion should raise the profits of small and large firms alike. The fact that it doesn't strongly suggests that efficiency, concentration, and profits are interrelated in American manufacturing. There are two bits of evidence which indicate the large-firm efficiency and collusive behavior coexist in much of American manufacturing. The first is the profitability studies of Imel and Helmberger [11], Gale [10], and Shepherd [21]. These studies suggest that, considered together, market share and concentration are both significantly positively related to profitability. If, as argued by McGee [15] and Weiss [25], market share is capturing the effect of lower costs (and/or superior products), concentration must be capturing the effect of collusive behavior. The second is Carter's [4] refinement of Demsetz's methodology. Carter regressed price-cost margins on concentration, capital intensity, and advertising intensity for large and small firms separately. He reports a positive concentration coefficient for large firms which is greater than that for small firms and which is significantly associated with large-firm profitability. The difference in the estimated coefficients may be taken as evidence of large-firm efficiency and the significance of the large-firm coefficient as evidence of collusive behavior. Whether the concentration-profits relationship derives largely from efficiency, as Demsetz believes, or largely from collusive behavior, as the conventional view would have it, is a more difficult empirical question. The answer has important implications for merger policies, remedies pertaining to tacitly collusive oligopolies, and legislative proposals

Collusion and the Pattern of Rates of Return

This paper considers methods of separating firms and industries into collusive and competitive subsets, and the differences in patterns of rates of returns which are to be expected among these groups. The approach adopted here is quite distinct, both in structure and in policy implications, from the customary technique of estimating a linear relation between concentration and profitability or margins, which is then used to indicate a level of concentration associated with an excessive exercise of monopoly power.' Elsewhere [6] I have indicated that the low levels of significance which typify estimates of the concentration-profits relationship, their observed nonlinearity, and the heteroskedasticity commonly visible in residuals computed from such estimates all indicate that concentration, while an important determinant of the feasibility of collusion, is far from the only factor conditioning its success. As an alternative this paper outlines a proposed classification scheme for the identification of collusion which is based on price-cost margins in U.S. manufacturing for 1967. Margin data derived from Census industry tabulations are corrected for a variety of inter-industry influences compatible with competition. Following these corrections, the distribution of residuals at high concentration levels is shown to exhibit both positive skewness and more dispersion than is observed for low concentration industries, suggesting the presence of contamination by monopoly elements. The residual distribution is separated into competitive and monopoly components with large positive outliers being regarded as monopolized. One important result of applying this technique to U.S. data is a finding that many high-concentration industries appear to achieve only competitive margins. This result indicates that across-theboard deconcentration would involve restructuring a number of competitive industries. This classification scheme is outlined in more detail in Section II. The second stage of the process of identifying collusive industries involves presentation

The Critical Concentration-Profitability Relationship and Structure-Performance Analysis: Some Canadian Evidence

The Critical Concentration-Profitability Relationship and Structure-Performance Analysis: Some Canadian Evidence

Aggregation and the Concentration-Profitability Relationship

Aggregation and the Concentration-Profitability Relationship

The Gains and Losses from Industrial Concentration

In essence, this paper will try to decompose the concentration-profits relationship into separate concentration-price arid concentration-cost relationships. By doing this, I hope to shed light on some of the allocative and distributive issues that, I suspect, give the subject its intrinsic interest, but which have not so far been confronted empirically: Does high concentration save or waste resources? Does it lead to higher prices? Who gains and loses from a social policy hostile to high concentration? Since the unique aspect of the paper is its focus on a concentration-cost relationship, most of the analytical effort is spent here. I review the theory underlying such a relationship, and develop and implement a model designed to estimate its importance. Subsequently, I try to estimate how much of the usual profit-concentration relationship is due to cost effects and how much to price effects. The main conclusion is that, while price effects are not absent, the cost effects so dominate them as to cast doubt on the efficacy of any general legal rule hostile to industrial concentration.

The Concentration-Profitability Relationship: Is There a Critical Concentration Ratio?

A MAJOR concern of the body of economic analysis surrounding the theory of the firm is whether the pricing behavior of oligopolistic industries differs from that of competitive industries. Theory suggests that where small groups of sellers account for a substantial proportion of an industry's output, the recognition of mutual interdependence will result in the absence of price competition. Furthermore, the prices and profits are expected to be above the level that would obtain under competitive conditions. Empirical investigations of the relationship between seller concentration and profitability have produced results generally in accord with the theory. However, neither theory nor the empirical evidence provides a clear insight into the specific nature of the concentration-profitability association. The unanswered question is whether or not there is a 'threshold' level of concentration which separates groups of industries earning significantly different profit rates. The purpose of this study is to examine empirically whether a dichotomous functional form of the concentration-profitability association presents a better explanation of the underlying relationship than the continuous linear form: and, if it does, how concentration and profitability are related within the separated groups. The results suggest that there is a critical value for concentration and that there is no significant association between concentration and profit rates within high and low concentration groups.

The Nature of the Concentration: Price/Cost Margin Relationship for 352 Manufacturing Industries: 1967

During the past decade there have been an increasing number of empirical investigations into the relationship between industry structure and performance. These studies (the landmark work in this area is Bain [3] and other important studies include Stigler [27], Miller [19], Comanor and Wilson [8], and Collins and Preston [7]) have provided almost unanimous support for the hypothesis that industry structure is an important determinant of industry profit performance.1 In view of the fact that these studies have used a wide variety of data sources and testing techniques, the general consistency of results is quite impressive. Nonetheless, students of industrial organization who attempt to apply these results to questions of antitrust policy find serious gaps in our knowledge of market competition, which unfortunately hinder the development of a rational antitrust policy. One important area of uncertainty and disagreement centers on the nature of the relationship between industry concentration and profitability.2 The basic question is whether the concentration-profitability (C-P) relationship is continuous and linear or whether it is subject to a distinct break at some critical level of concentration. Only a few studies have given even peripheral attention to this question, and they have yielded conflicting results.3 Because of the limited evidence on this question and because of its potential importance to the formulation of antitrust policy, a detailed examination of the problem is needed.4 This study presents new empirical evidence on the nature of the concentrationprofitability relationship. The analysis is based on nearly the entire universe of manufacturing industries for which data were available from the recently published 1967 Census of Manufactures. To examine the more general structure-performance hypothesis with the new Census data, several additional independent variables are in-

The Concentration-Profitability Relationship: Policy Implications and Some Empirical Evidence

The Concentration-Profitability Relationship: Policy Implications and Some Empirical Evidence