Monopolisation and Industry Structure
The aim of this paper is to provide empirically testable predictions regarding the relationship between market size and concentration. In a model of endogenous horizontal mergers, it is shown that concentrated outcomes cannot be supported in a free entry equilibrium in large exogenous sunk cost industries: the upper bound to concentration tends to zero as market size (relative to setup costs) tends to infinity. In contrast, arbitrarily concentrated outcomes may be sustained in endogenous sunk costs industries, no matter how large the market, and even in the absence of mergers; that is, the upper bound to concentrated does not decrease with market size. Using an equilibrium concept defined in the space of observable outcomes, it is shown that these predictions to not depend on the details of the extensive form of the game, even allowing for side payments between firms and endogenous product choice. The results complement those of Sutton (1991) on the stability of fragmented outcomes.
|Date of creation:||01 Oct 2000|
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