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Competition and Critical Mass

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  • Bos Jaap W.B.
  • Ling Chan Yee
  • Kolari James W
  • Yuan Jiang

    (METEOR)

Abstract

Empirical literature and related legal practice using concentration as a proxy for competition measurement are prone to a fallacy of division, as concentration measures are appropriate for perfect competition and perfect collusion but not intermediate levels of competition. Extending the classic Cournot-type competition model of Cowling and Waterson (1976) and Cowling (1976) used to derive the Hirschman-Herfindahl Index (HHI) of market concentration, we propose an adaptation of this model that allows collusive rents for all, none, or some of the firms in a market. Application of our model and new critical mass measures to data for U.S. commercial banks in the period 1984-2004 confirms that concentration measures are unreliable competition metrics. Our results lead us to conclude that critical mass is a promising new market power metric for competition analyses. Policy and future research implications are briefly discussed.

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Bibliographic Info

Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 063.

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Date of creation: 2010
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Handle: RePEc:unm:umamet:2010063

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Keywords: microeconomics ;

References

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  1. Philippe Aghion & Nicholas Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2002. "Competition and innovation: an inverted U relationship," IFS Working Papers, Institute for Fiscal Studies W02/04, Institute for Fiscal Studies.
  2. Cowling, Keith, 1976. "On the theoretical specification of industrial structure-performance relationships," European Economic Review, Elsevier, Elsevier, vol. 8(1), pages 1-14, June.
  3. Gilbert, R Alton, 1984. "Bank Market Structure and Competition: A Survey," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 16(4), pages 617-44, November.
  4. R. Alton Gilbert & Adam M. Zaretsky, 2003. "Banking antitrust: are the assumptions still valid?," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Nov, pages 29-52.
  5. Allen N. Berger & Timothy H. Hannan, 1987. "The price-concentration relationship in banking," Research Papers in Banking and Financial Economics, Board of Governors of the Federal Reserve System (U.S.) 100, Board of Governors of the Federal Reserve System (U.S.).
  6. Jaap W. B. Bos & James W. Kolari, 2005. "Large Bank Efficiency in Europe and the United States: Are There Economic Motivations for Geographic Expansion in Financial Services?," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 78(4), pages 1555-1592, July.
  7. Allen N. Berger & Asli Demirgüç-Kunt & Ross Levine & Joseph G. Haubrich, 2004. "Introduction: Bank concentration and competition: an evolution in the making," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 433-451.
  8. Boone, Jan, 2004. "A New Way to Measure Competition," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4330, C.E.P.R. Discussion Papers.
  9. Berger, Allen N, et al, 2004. "Bank Concentration and Competition: An Evolution in the Making," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 36(3), pages 433-51, June.
  10. Evans, William N & Kessides, Ioannis N, 1993. "Localized Market Power in the U.S. Airline Industry," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 66-75, February.
  11. Berger, Allen N, 1995. "The Profit-Structure Relationship in Banking--Tests of Market-Power and Efficient-Structure Hypotheses," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 27(2), pages 404-31, May.
  12. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1992. "Microeconomic Rigidities and Aggregate Price Dynamics," NBER Working Papers 4162, National Bureau of Economic Research, Inc.
  13. Cowling, Keith & Waterson, Michael, 1976. "Price-Cost Margins and Market Structure," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 43(171), pages 267-74, August.
  14. Goldberg, Lawrence G. & Rai, Anoop, 1996. "The structure-performance relationship for European banking," Journal of Banking & Finance, Elsevier, Elsevier, vol. 20(4), pages 745-771, May.
  15. Marie Goppelsroeder & Maarten Pieter Schinkel & Jan Tuinstra, 2006. "Quantifying the Scope for Efficiency Defense in Merger Control: The Werden-Froeb-Index," Tinbergen Institute Discussion Papers, Tinbergen Institute 06-074/1, Tinbergen Institute.
  16. J.W.B. Bos & J. Kolari & R. van Lamoen, 2009. "Competition and innovation: evidence from financial services," Working Papers, Utrecht School of Economics 09-16, Utrecht School of Economics.
  17. Adelman, M A, 1969. "Comment on the "H" Concentration Measure as a Numbers-Equivalent," The Review of Economics and Statistics, MIT Press, vol. 51(1), pages 99-101, February.
  18. Aghion, Philippe, et al, 2001. "Competition, Imitation and Growth with Step-by-Step Innovation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 68(3), pages 467-92, July.
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