The concentration-margins relationship reconsidered

Abstract

THIS PAPER DISCUSSES an old and much-maligned topic: the cross-sectional relationship between the concentration of firms in the marketplace and price-cost margins. 1 Because it is hard to imagine a literature for which modern graduate students in economics are taught to have more con-tempt, some immediate justifications are in order. I have two. First, despite the well-known problems with this literature, it continues to affect antitrust policy. The inappropriate inferences used to justify an active antitrust policy have given way to equally incorrect inferences that have been used to justify a relaxed merger policy. Second, the alternative to cross-industry studies is to study specific industries. In-deed, the econometric analysis of individual industries has been labeled the "new empirical industrial organization. "2 Although this develop-ment is a healthy one, it is important to recall that it was the failure of studies of individual industries to yield general insights that made cross-industry studies popular. One might argue that the primary lesson from three decades of cross-sectional studies is that general principles based on simple indicators are not to be had. Nevertheless, the imprecision