Revisiting the Concentration-Profits Relationship in South Africa: Moving the Debate Beyond Deadlock

Having played out for nearly five decades, the concentration-profits controversy is perhaps one of the longest running debates in the field of Industrial Organisation. Sadly, the well worn path of cross section study has forced the debate into an impasse, unable to render clear or precise conclusions. However, we believe that cross section study can still yield important insights provided its purpose is not to validate the deterministic either/or stance endemic in the SCP paradigm/Chicago debate. By re-orientating the debate away from a search for sterile “laws” that supposedly govern whether concentration is a proxy indicator for monopoly abuse or the by-product of greater efficiency, the South African debate can escape the gridlock. In the first part, this study replicates the seminal works of Collins and Preston (1969), Comanor and Wilson (1967) and Weiss (1974). These studies are important because they provide a framework within which the interrelationships between a number of key variables - such as buyer concentration, regional concentration and various barriers to entry - are examined for the first time using South African data. This study shows that there is much richness in the complex array of structure and performance relationships that persist between key industry variables. The second half of the investigation probes further, testing a series of simultaneous equations to understand how endogeneity and simultaneity considerations might blur the expected lines of causality within the concentration-profits relationship. A number of key inferences are drawn, highlighting a number of surprising results.