Economics Dictionary of ArgumentsHome
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| Market concentration: Market concentration in economics refers to the extent to which a small number of firms dominate total sales, production, or capacity in a market. High concentration suggests less competition and potential market power, while low concentration indicates a more competitive environment. It is often measured using indicators like the Herfindahl-Hirschman Index (HHI) or concentration ratios. See also Markets, Free market, Organisaion, Competition, Monopolies, Monopolistic competition, Oligopolies._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Harold Demsetz on Market Concentration - Dictionary of Arguments
Henderson I 7 Market Concentration/industrial organization/Demsetz/Henderson/Globerman: Tradition: Prior to Demsetz's work, economists in the area of what's called industrial organization were suspicious of big firms whose revenues were a large percent of overall industry revenues. Such firms charged above-competitive prices, they claimed, thereby harming consumers and reducing overall economic effciency. >Monopolies, >Monopolistic competition, >Cartels, >Efficiency. DemsetzVsTradition: Demsetz argued that market concentration could reflect the superior effciency of firms With large market shares primarily resulting from innovation, and he supported his argument with empirical evidence. Government efforts to break up large firms or restrain their growth was, therefore, likely to reduce innovation and economic effciency, with consequent harm to consumers. >Innovation, >Progress, >Technological progress, >Economic growth. Demsetz/Peltzman: Peltzman argues that Demsetz's work fundamentally altered the hitherto mechanical application of legal restrictions on mergers between relatively large firms to a more "rule-of-reason"-based approach, whereby the potential for effciency gains was weighed in the balance. Henderson I 65 Market concentration/Demsetz/Henderson/Globerman: In a Conversation with Harold Demsetz, a 2008 interview with UCLA law professor Mark Grady, Demsetz tells of something he heard at the University of Chicago that led him to work he did at UCLA. Size of the firm/profit: Someone at the University of Chicago's Quadrangle Club had asserted that the only company making money in the auto industry was General Motors. At the time, GM was by far the largest auto company in the United States. Performance/Demsetz: And if the assertion were true, reasoned Demsetz, then the large profits in concentrated industries would be due not to concentration per se but to better performance by the larger firms. Profits: Demsetz decided to delve into this idea by systematically looking at data on profits of large firms in concentrated industries. The result was his 1973 article, "Industry Structure, Market Rivalry and Public Policy."(1) Competition: The article suggests that the relationship between profits and larger firms runs in the opposite direction. Under competitive market conditions, he argues, specific firms might develop differential advantages due to innovations that either Iower their costs or give their products advantages over other products. Lower costs will lead directly to higher profits for those innovating firms. Innovation: Superior products would allow innovating firms to charge higher prices than their competitors, which, in turn, would increase the former's profits given that average costs do not increase commensurately. Efficiency/market: At the same time, the competitive advantages of innovative firms will contribute to increased market concentration as those firms take away market share from their less effcient competitors. In his research paper, Demsetz provided empirical evidence that higher price-cost margins reflect superior effciency which, in turn, is linked to resulting increased market concentration. >Economies of Scale/Demsetz, >Antitrust laws/Demsetz, >Monopolies, >Antitrust/Policy of the US. For many decades, the "Structure-Conduct-Performance" (SCP) paradigm* dominated antitrust theory and practice. The SCP paradigm basically maintained that if a relatively small number of firms has a large market share, those firms will refrain from competing with each other, particularly with respect to reducing their prices. As a consequence, consumers will pay higher prices and producers will earn higher profits than would be the case if a larger number of firms each had a relatively smaller market share. Henderson I 67 Demsetz's famous 1973 paper(1), buttressed by Peltzman's empirical work(3), fundamentally overturned the widespread interpretation of the SCP paradigm. >Economies of scale/Demsetz. VsTradition: In particular, it undermined the conventional wisdom that relatively high levels of industrial concentration signal much weaker competitive behaviour and likely ineffcient performance. >Competition. Indeed, it cautions that precisely the opposite inference might be appropriate in many cases. This insight has been incorporated into the practice of antitrust law. >Antitrust laws/Demsetz. The evaluation of proposed mergers and acquisitions, as well as business practices that are identified in law as being potentially anticompetitive, incorporate both a wider range of criteria beyond industry concentration ratios and also take into account the potential for larger firm size to promote increased effciency. * For an overview of this paradigm, see Bain (1968)(2). 1. Demsetz, Harold (1973). Industry Structure, Market Rivalry and Public Policy. Journal of Law & Economics 16, 1: 1-9. 2. Bain, Joe S. (1968). Industrial Organization. Wiley. 3. Peltzman, Sam (1977). The Gains and Losses from Industrial Concentration. Journal of Law & Economics 20, 2: 229-263._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
EconDems I Harold Demsetz Toward a theory of property rights 1967 Henderson I David R. Henderson Steven Globerman The Essential UCLA School of Economics Vancouver: Fraser Institute. 2019 |
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> Counter arguments against Demsetz
> Counter arguments in relation to Market Concentration
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