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Competition and Critical Mass

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


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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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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  16. 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.
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