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Antimonopoly Studies
For those members of the list who're interested in exploring the
economic literature on antimonopoly policy, the following is an excerpt from
my Web site at:
http://webpages.metrolink.net/~cmueller
Please note that this address contains a correction--the earlier
'www' is now replaced by 'webpages.'
Charles Mueller, Editor
ANTITRUST LAW & ECONOMICS REVIEW
http://webpages.metrolink.net/~cmueller
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ANTITRUST LAW & ECONOMICS REVIEW
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Concentration and Price: The Research
U.S. antitrust laws are aimed at protecting "competition"
but they contain no definition of that term. The courts and the
enforcement agencies--FTC and Justice's Antitrust
Division--have equated competition with competitive prices. To
stop a merger (or an anticompetitive practice, e.g., predatory
pricing), the plaintiff must convince a court that, if it's not
stopped, prices to the consumer are going to rise to
higher-than-competitive levels. How does one prove a
consequence before the event?
If an industry has 10 firms and 9 of them propose to
merge--or if 1 of them decides to bankrupt, say, 8 of the others
via below-cost pricing (leaving only 2 competitors in that
market, one with, say, 60% and the other 40%)--how does a
judge decide whether supra-competitive prices will be the
result? U.S. judges currently accept the Chicago view that only
2 competitors are required to assure consumers of
"competitive" prices (and that only 1 is needed if "entry" is
sufficiently easy). They would therefore approve the 9-firm
merger and the elimination of 8 firms via predatory pricing
(both creating a 2-firm industry, with 60% for the leader) in
the above examples. Is this good economic science?
Until about the mid-'70s, economic researchers in the U.S.
reported that there was a systematic positive relationship
between an industry's or market's structure (concentration
and the like) and its price/profit level, with the threshold of
noncompetitive prices being a top-4-firm share of around 40%
(equivalent to a 1-firm share of about 12%). This meant, for
example, that mergers should be stopped if the acquiring firm
would, via the merger, go over that 12% market share
threshold. (If one firm can merge its way to a 12% share, all
others have the same right, so we get a 4-firm share of
48%--and prices that exceed the competitive level.) National
policy was set accordingly: Mergers yielding shares above 12%
were stopped (as were such predatory pricing campaigns).
Firms wanting to grow larger had to do it via fair internal
growth, e.g., by offering a better product at a lower price.
The country's 1,000 judges thus had a clear antitrust rule,
one they could apply on their own, without a lot of "expert"
economic testimony: Competition was going to be
injured--prices to the consumer were going to rise, innovation
was going to be lessened, and so on--if they approved a merger
or an anticompetitive practice (e.g., price discrimination) that
elevated the offender's market share above that 12% threshold
of pricing power. This key research finding--that prices began
to exceed the competitive level when the 4 largest firms in an
industry control some 40% of its sales (and 1 firm has more
than 12%)--implies that about 10 competitors, all of roughly
equal size, are required to drive consumer prices to the
minimum competitive level.
The U.S. courts in 1997, following Chicago economic
theory, reject this longstanding research finding. (See our
'Dirty Dozen' U.S. Antitrust Cases, above.) Here we have the
central issue of competition policy worldwide: Does the kind of
"competition" we want--minimum prices for consumers, the
best in technological innovation, fairness for other
entrepreneurs, and the like--mean just 2 firms (with up to 60%
for the largest) or does it mean 10 firms (no more than 12%
for the biggest)? 2 firms or 10? A top firm share of 60% or
12%?
Economic science, one supposes, should be able to give us a
solid answer to so important an economic question. So what
are the leading research studies here? Are they available--or
can they be made available--online? A few have been
recommended to us and we list them below. Hopefully we'll be
advised of others and all can be made available online. For
further reading, we also offer below a list of important books
in the field. A brief (10-page) summary of the concepts and
major findings in the field are presented in one of the articles
in our own Web site here and a review of the principal studies
on the Concentration/Price issue (up to the 1980s) is also
available online in this site:
"Glossary of Antitrust Terms," by Charles E. Mueller.
"Relationship Between Concentration and Prices/Profits," by
Russell C. Parker.
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Research Studies
Special emphasis should be given to the first study in the
list below, one conducted by a team of university economists
for the Joint Economic Committee of Congress in 1977. A
study of several supermarket chains operating in 35 cities, its
central finding was that prices increased, on average, by 8.9%
as the share of the largest firm rose from 4% (in a 4-firm-40%
market) to 38.5% (in a 4-firm-70% market). The other studies
here are broadly consistent with that major finding.
"The Profit Performance of Leading Food Chains 1970-'74,"
by B.W. Marion et al., Study for the Joint Economic
Committee, U.S. Congress, 95th Cong., 1st Sess. (1977).
"Market Power In the Retail Food Industry: Evidence from
Vermont," by R.W. Cotterill (Review of Economics & Statistics,
North-Holland, 1986).
"Market-Structure Determinants of National Brand-Private
Label Price Differences of Manufactured Food Products," by
J.M. Connor and E.B. Peterson (Journal of Industrial
Economics, June 1992).
"Cyclical Variation in the Profit-Concentration Relationship,"
by W.F. Mueller and M.H. Sial (Review of Industrial
Organization 8:277, Kluwer, 1993).
"Concentration-Price Relations in Regional Fed Cattle
Markets," by B.W. Marion and F.E. Geithman (Review of
Industrial Organization 10:1, Kluwer, 1995).
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Other Recommended Readings
Adam Smith, THE WEALTH OF NATIONS (1776) (Modern
Lib. Ed. 1936).
John Moody, THE TRUTH ABOUT THE TRUSTS (1904)
(Greenwood Press, 1936).
E.H. Chamberlin, THE THEORY OF MONOPOLISTIC
COMPETITION (Harvard U. Press, 1933).
G.W. Stocking and M.W. Watkins, MONOPOLY AND FREE
ENTERPRISE (20th Century Fund, 1951).
J.S. Bain, BARRIERS TO NEW COMPETITION (Harvard U.
Press, 1956).
J.S. Bain, INDUSTRIAL ORGANIZATION (Wiley, 1968).
J.M. Blair, ECONOMIC CONCENTRATION (Harcourt,
1972).
L.W. Weiss (ed), CONCENTRATION AND PRICE (MIT
Press, 1989).
M.E. Porter, THE COMPETITIVE ADVANTAGE OF
NATIONS (Macmillan, 1990).
Suggested additions to both of these lists will be most
welcome. Hopefully the authors of the articles listed--if they
have not done so already--will make them available online
through their respective university Web sites, which would of
course permit us to add "links" to them here, thus making their
full texts available to all. This journal, the ANTITRUST LAW
& ECONOMICS REVIEW, welcomes new articles here--as well
as those addressing the economics of one or more of the 'Dirty
Dozen' Supreme Court cases listed above.
Copyright(c) 1997-1998 Antitrust Law & Economics Review, Inc.
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