Price-Concentration Studies: There You Go Again Prepared for the DOJ/FTC Merger Workshop, “Concentration and Market Shares” panel

Price-concentration studies are important because they are widely seen as supporting the standard prediction that high seller concentration tends to harm consumers and because both antitrust agencies use them in assessing horizontal mergers. But price-concentration studies are severely flawed. In industries in which sellers compete on quality and amenities, a positive price-concentration relation could result, not from coordinated effects, but from competitive superiority. Since such non-price competition is ubiquitous and is usually intense, this poses a significant problem of interpretation. Further, non-price competition cannot be controlled for statistically, as is frequently assumed. Even if sellers compete exclusively on price, price-concentration studies are still severely flawed. Differences in market size could induce a positive price-concentration relationship, but as with competitive superiority, a price-concentration relationship resulting from this cause does not imply consumers are being harmed. Market size differences may well account for the observations that the FTC attributed to non-competitive behavior in Staples. The paper concludes with some suggestions for improving price-concentration studies and for further research. Stylized Fact 5.1: In cross-section comparisons involving markets in the same industry, seller concentration is positive related to the level of price.. .. The relation between concentration and price seems much more robust statistically than that between concentration and profitability. Since studies of price have fewer obvious weaknesses than studies of profitability, Stylized Fact 5.1 seems to provide the best evidence in support o f the concentration-collusion hypothesis [footnote omitted]. In this study, and several others in this book, it is clear that concentration does raise price. The basic hypothesis of oligopoly theory has lots of support. Our two-decade digression on concentration and profits and our subsequent 13 years of doubt were unnecessary. Tacit collusion, often described as price followship, most certainly does occur in concentrated markets. How otherwise would one observe a positive relationship between concentration and price levels? A more direct approach is to test the relationships between market structure and selling prices directly (Weiss).. .. Here, the relationship of concentration to price is uniformly positive, which tends to dismiss the efficiency hypothesis as empirically groundless. My overall assessment is that the concentration-price studies clearly establish the association between industry structure and performance in a manner not subject to the Chicago-school or any other criticism of profits studies. For that reason, I myself ceased emphasizing concentration-profits relationships in my teaching and research some years ago, focusing instead on price studies. Regarding the …