Market Structure: The Bounds Approach

1. Introduction Why are some industries dominated worldwide by a handful of firms? Why is the size distribution of firms within most industries highly skewed? Questions of this kind have attracted continued interest among economists for over half a century. One reason for abiding interest in such questions of 'market structure' is that this is one of the few areas in economics where we encounter strong and sharp empirical regularities arising over a wide cross-section of industries. The fact that such regularities override all the idiosyncratic features that distinguish one market from another suggests that they are moulded by some highly robust economic mechanisms – and if this is so, then these would seem to be mechanisms to which we should pay particular attention. If, for example, ideas from the I.O. field are to have relevance in other areas of economics, such as International Trade or Growth Theory, then it is crucial to look to results that hold good across all industries, or at least some broad class of industries-for the questions arising in these fields are normally of the form, " what effect will this policy have on the economy as a whole? ". In other words, the only kind of mechanisms that are of interest here, are those that operate with some regularity across the general run of markets. The recent literature identifies two mechanisms of this 'robus' kind. The first of these links the nature of price competition in an industry to the level of market concentration. It tells us, for example, how a change in the rules of competition policy will affect concentration: if we make anti-cartel rules tougher, for example, concentration will tend to be higher. (A rather paradoxical result from a traditional perspective, but one that is quite central to the class of 'free entry' models that form the basis of the modern literature). The second mechanism relates most obviously to those industries in which R&D or Advertising play a significant role (though, its range of application extends to any industry in which it is possible for a firm, by incurring additional fixed (as opposed to variable) costs, to raise consumers' willingness-to-pay for its product(s), or to cut its unit variable cost of producing them. This mechanism places a limit in such industries, the degree to which a fragmented (i.e. low concentration) structure can be maintained in the industry; if all firms are small, …