Seller Concentration Research Articles

Advertising, its determinants, and market structure

This study derives a formal model of firm advertising behavior and applies it to the industry level to figure out the relationship between advertising and market structure. The firm advertising model shows that both consumer preference andfirm-specific advertising competence jointly determineprofit-maximizing advertising intensity. At the industry level, advertising intensity is represented multiplicatively by consumer preference and a measure of market structure, which reflects the joint distribution of the levels of advertising competence and market shares among firms. The new market structure measure suggests that those single-dimensional measures of market structure such as seller concentration and the Herfindahl index are inadequate in explaining interindustry differences in advertising intensity, and that the long-debated advertising-concentration relationship differs depending primarily on the appropriability of advertising. An empirical analysis of 426 five-digit Korean manufacturing industries shows that an inverted U-shaped relationship between the Herfindahl index and industry advertising intensity is observed for consumer goods industries but a lazy J-shaped relationship for producer goods industries.

Competing at Home to Win Abroad: Evidence from Japanese Industry

The study explores the influence of domestic competition on international trade performance, using data from a broad sample of Japanese industries. Domestic rivalry is measured directly using market-share instability rather than employing structural variables such as seller concentration. We find robust evidence that domestic rivalry has a positive and significant relationship with trade performance measured by world export share, particularly when R&D intensity reveals opportunities for dynamic improvement and innovation. Conversely, trade protection reduces export performance. These findings support the view that local competition—not monopoly, collusion, or a sheltered home market— pressures dynamic improvement that leads to international competitiveness.

Strategic Interdependence in Organizations: Deconglomeration and Marketing Strategy

Although strategy exists at multiple levels in a firm (corporate, business, and functional), there is a dearth of research in marketing literature that focuses on the dependency among strategy at different levels. The authors address this issue by examining the relationship between deconglomeration and marketing strategy. Deconglomeration refers to the divestiture behavior of a conglomerate firm and the transformation of its business portfolio from one that is largely composed of several unrelated businesses to one composed of fewer and related businesses. Drawing on multiple theoretical perspectives, the authors propose a conceptual model delineating the environmental and organizational drivers of deconglomeration and its outcomes for marketing. The authors suggest that after deconglomeration, (1) a firm can be expected to be more competitor and customer oriented, (2) multimarket contact with competing firms and seller concentration will increase, (3) businesses retained by the firm will be more innovative and place greater emphasis on advertising compared with sales promotion, and (4) the firm's culture may become more externally oriented. Furthermore, the locus of decision making for marketing strategy may shift more toward senior management levels. In summary, changes in a firm's corporate strategy could lead to significant changes in the marketing strategy of its business units.

The impact of Wal-Mart supercenters on supermarket concentration in U.S. metropolitan areas

Wal-Mart's 1999 sales in its Supercenter stores will rival that of Kroger, the leading national supermarket chain. With estimated sales at $45–47 billion plus growth of 40% from $32 billion in prior year sales, Wal-Mart's growth has been accomplished without expansion by acquisition or merger. This growth was achieved by capital investment, building new or reformatting existing Wal-Mart stores with the Supercenter format, a hypermarket with general merchandising and full-size supermarket areas. Currently, the number of Wal-Mart Supercenters exceeds 721. Wal-Mart opened 275 Supercenters during 1998 and 1999 and will continue the pace, exceeding 1,400 by the year 2005. These Supercenters will affect the market position and competitive strategies of other food retailers. To date, most reformatting has been in smaller cities and rural areas, perhaps because they tend to have less organized labor markets. This study finds Wal-Mart Supercenter entry had little impact on food seller concentration in major metropolitan areas between 1993 and 1999. Wal-Mart entered 54 of the largest 100 metro areas. Wal-Mart tended to enter cities in the south and east. There is no correlation between entry and city size. Multiple linear regression analysis however indicates that Wal-Mart's market shares are highest in lower income and smaller metro areas. [Econ-Lit citations: L130, L200] © 2001 John Wiley & Sons, Inc.

Competing at Home to Win Abroad: Evidence from Japanese Industry

The study explores the influence of domestic competition on international trade performance, using data from a broad sample of Japanese industries. Domestic rivalry is measured directly using market share instability rather than employing structural variables such as seller concentration. We find robust evidence that domestic rivalry has a positive and significant relationship with trade performance measured by world export share, particularly when R&D intensity reveals opportunities for dynamic improvement and innovation. Conversely, trade protection reduces export performance. These findings support the view that local competition, not monopoly, collusion, or a sheltered home market, pressures dynamic improvement that leads to international competitiveness.

Durability Versus Concentration as an Explanation for Price Inflexibility

We document the extent of price rigidity across United States manufacturing industries in the 1980s and early 1990s and compare rigidity across different phases of the business cycle. We measure price rigidity in three ways – each under four different sets of assumptions. We take an approach that relies on disaggregated data; we look at price patterns for over 4000 individual manufactured commodities. Both durability and seller concentration are found to be important factors explaining differences in price rigidity across industrial product classes. Using our data, we replicate the regression results found in Carlton (1986) that were based on actual transaction prices from the 1960s.

Competition in Auditing: Evidence from Entry, Exit, and Market Share Mobility in Germany versus The Netherlands*

AbstractThis paper investigates the usefulness of a dynamic analysis of audit‐market competition in terms of audit‐market‐share mobility, audit‐firm entry, and audit‐firm exit. These dynamic measures of market structure are compared between the more regulated German audit market and the more liberal Dutch audit market. Prior research on audit market structure has focused on static analyses in terms of seller concentration of single national audit markets. By using data on the number of auditors as the measure of audit‐firm size, this paper covers all firms active in the two audit markets in the period 1970 to 1994. The results indicate that the more liberal Dutch audit market has the highest dynamic measures of market structure and the highest concentration. Hence, the results show that high concentration can go hand in hand with high‐market‐share mobility and high audit‐firm entry and exit. The results for market‐share mobility also hold for an analysis including only the largest audit firms. The paper therefore concludes, that compared with a static seller concentration analysis, an analysis of audit‐market dynamics provides a better description of the degree of competition in audit markets.

Determinants of intraindustry trade between the united states and industrial nations

This article identifies industry-level determinants of intraindustry trade (IIT) between the United States and other industrial nations. Results do not support the role of scale economies in determining the extent of IIT. Significant negative relationships are established between scale economies and the extent of IIT. Other findings are consistent with a monopolistic competition approach to trade modeling. The extent of IIT is greater for industries with many establishments and low seller concentration ratios producing differentiated and nonstandaridized goods. Modern theoretical models preoccupied with scale economies should place more emphasis on other sources of intraindustry specialization related to monopolistic competition, such as variety, quality, technologically based product differentiation, and the degree of product standardization.

Price and seller concentration in cement: effective oligopoly or misspecified transportation cost?

A positive correlation between price and seller concentration in cement markets disappears if a different proxy for transportation costs, population density, is included in the specification.

Market‐structure Determinants of National Brand–Private Label Price Differences of Manufactured Food Products: Reply

This paper estimates the relationships between market structure and the Lerner index of monopoly constructed from price data on processed food products sold through grocery stores. A theoretical model of a differentiated oligopoly specifies two determinants of price-cost margins: the Herfindahl-Hirschman index of seller concentration adjusted for the elasticity of demand and the industry advertising-to-sales ratio. The results indicate that the three principal determinants of price-cost margin variation, in order of their impacts, are: advertising intensity, elasticity of demand, and concentration. Previous structure-performance studies that did not incorporate the elasticity of demand were probably misspecified.

What happens to industrial structure when countries liberalise? Indonesia since the mid‐1980s

In the large literature on the consequences of economic liberalisation, few studies have examined the impact on industrial structure. Indonesia provides a suitable case study: its policy reforms from the mid‐1980s were decisive, and its industrial data base is relatively sophisticated. This article briefly develops a framework with which such issues may be examined, and then assesses the impact of policy reforms on seller concentration, ownership, size distribution, spatial composition, and total factor productivity growth over the pre‐ and post‐reform periods. The main conclusion is that, unlike the liberalisation‐efficiency nexus, the effects of the policy changes on industrial structure appear to be limited. Our conclusions are necessarily tentative, given the short period of time under examination, and given the difficulties — both empirical and theoretical ‐ of establishing the direction of causality.

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...

The Changing Structure Of The Market For Audit Services In The UK—a Descriptive Study

This paper is motivated by the debate which currently exists concerning the joint effect on the UK audit market of audit firm mergers and increasing competitive pressures. Based on a large sample of 2,079 domestic listed companies, measures of seller concentration are calculated for the period 1987 to 1991. The three principal factors which have contributed towards the change in concentration are identified as audit firm mergers, voluntary realignments (auditor switching) and the auditor distribution of newly listed companies. The relative impact of these factors on seller concentration is measured. The results of this study are placed in perspective via cross-study longitudinal and inter-country comparisons of concentration ratios and annualized rates of auditor change. Results indicate an increasing level of seller concentration in the UK market for audit services, which is also high relative to other countries, and a high and rising instability in client-auditor relationships. Policy implications are discussed.

Assessing the Importance of Oligopsony Power in Agricultural Markets

Oligopoly, competition among few sellers, is the cornerstone of industrial organization (IO). Conversely, its sister concept, oligopsony, competition among few buyers, is scarcely mentioned. For example, oligopsony is not discussed in the entire two volume Handbook of Industrial Organization, and monopsony is mentioned only in the context of incentives to integrate vertically. Two reasons apparently account for IO economists' lack of interest in buyer market power: (i) they don't think it's very important, and (ii) they don't believe it presents any unique modeling issues relative to seller market power. Scherer and Ross illustrate this first viewpoint, arguing that average on the buyers' side in manufacturing is undoubtedly lower than seller concentration (p. 519). Tirole, in his masterful treatise on IO theory, illustrates the second, dispatching monopsony power in one sentence: Naturally the conclusions [regarding monopoly power] would also hold as well for monopsony power... (p. 65). We argue that this dismissive treatment of buyer market power is not reasonable for economists interested in agriculture and agricultural markets. The Scherer and Ross viewpoint may apply when considering generic inputs such as labor, capital, and energy. Competition for these inputs is apt to exceed competition for the outputs they produce because firms cross product market boundaries to compete for these inputs, and there is essentially no branding among input buyers to diminish price competition among them. Moreover, these inputs are typically mobile, hence, in elastic supply to individual buyers, limiting the exercise of oligopsony power even in geographic settings where relatively few buyers prevail. This view of input markets does not apply, however, to first-handler markets for the raw agricultural commodities that are inputs into the processed or fresh-packed food products.' We identify the following distinctive structural characteristics of these markets:

Further Evidence on Competition in the US Grain Export Trade

This study analyzes the relationship between export market structure and the pricing behavior of U.S. grain exporting firms. A generalized Cournot model is estimated by two-stage least squares using pooled data sets for U.S. wheat and corn exports. The cross-sectional units correspond to foreign country destinations. Discriminatory export pricing behavior was found to be significantly related to export seller concentration, U.S. market share, total export volume, and import market size. Yet, the estimated coefficients linking these market structure variables to the export price markup were relatively small in magnitude, suggesting little quantitative impact from market power. Copyright 1994 by Blackwell Publishing Ltd.

Pricing behavior in United States manufacturing industries: A statistical study using disaggregated data

We investigate the relationship between industrial market structure and price flexibility (the administered-pricing hypothesis) across United States manufacturing industries by embedding market-structure variables in a model relating relative price variability (dispersion) and inflation. While we find support for a positive relationship between variability and inflation, we do not find that high seller concentration lessens the impact of inflation on price variability. We do find that the larger the efficient-sized plant, the lower the impact of inflation on variability. We also find strong effects of input prices and degree of product durability on relative price variability.

The intertemporal stability of the concentration-margins relationship in Dutch and U.S. manufacturing

Factors influencing price-cost margins are investigated using a rich panel data base of the Dutch manufacturing sector. Attention is devoted to the intertemporal stability of the relationship explaining price-cost margins and to a comparison with U.S. results. Our results indicate that isolated cross-section analyses can be misleading. Evidence is provided for similarities and dissimilarities between the U.S. and the Netherlands when explaining price-cost margins. Dutch margins are influenced by industry-specific factors such as sales changes, import competition, capital intensity and operating expenses. Domestic seller concentration, aggregate capacity utilization and export intensity play no distinct roles.

Labour's share, market structure and trade unionism

Using British manufacturing data this paper tests Kalecki's degree of monopoly theory of the determination of factor incomes. The paper demonstrates how both product market structure, captured by the live firm concentration ratio, and trade unionism, measured by collective bargaining agreements, shape production worker wage share. We report estimates in which it emerges that there is an important role for seller concentration in influencing wage share, but the estimated trade union coverage results are less robust. Our tests reveal that once idiosyncratic industry effects and accounted for the union effect on wage share disappears.

Firm-size distribution and price-cost margins in Dutch manufacturing

Industrial economists surmise a relation between the size distribution of firms and performance. Usually, attention is focused on the high end of the size distribution. The widely used four-firm seller concentration ratio, C4, ignores what happens at the low end of the size distribution. We investigate to what extent the level and the growth of small business presence influence price-cost margins in Dutch manufacturing. We use a large data set of 66 industries for a thirteen year period. This allows the investigation of both small business influences within a framework in which that of many other market structure variables is also studied. Evidence is shown that price-cost margins are influenced by large firm dominance, growth in small business presence, capital intensity, business cycle, international trade and buyer concentration.

Market-Structure Determinants of National Brand-Private Label Price Differences of Manufactured Food Products

This paper estimates the relationships between market structure and the Lerner index of monopoly constructed from price data on processed food products sold through grocery stores. A theoretical model of a differentiated oligopoly specifies two determinants of price-cost margins: the Herfindahl-Hirschman index of seller concentration adjusted for the elasticity of demand and the industry advertising-to-sales ratio. The results indicate that the three principal determinants of price-cost margin variation, in order of their impacts, are: advertising intensity, elasticity of demand, and concentration. Previous structure-performance studies that did not incorporate the elasticity of demand were probably misspecified.