Concentration and Profits: Does Concentration Matter?

• Author: Yale Brozen
• DOI: 10.1177/0003603X7401900214
• Published date: 01 June 1974
• Date: 01 June 1974

CONCENTRATION AND

PROFITS:

DO,ES

CONCENTRATION

MAnER?

In

the post-World

War

II

period, theeconomics profes-

sion madea lSD-degree

turn

from its pre-Great Depression

position in itsview of concentration.

In

the late nineteenth

and early twentieth centuries, the prevailing view seemed to

have been

that

even with only a few firms inanindustry,

price competition would be persistent

and

collusion difficult.

There was little concern with any probability of successful

collusion (shared monopoly or oligopoly)in industries where

four firms had,say,70 percent or more of anindustry's ca-

pacity or sales.Three or four firms were felt tobe sufficient

for competitive behavior."

What

concern was expressed was

in terms of

"trusts"

combining most of

an

industry's capacity

under a single management.

Even where more

than

70 percent of an industry's ca-

pacity

had

been combined to form asingle firm, no

fear

was

felt by many economists

that

a monopoly result would ensue,"

•Professor of BusinessEconomics, Graduate School of Business,

University of Chicago; Adjunct Scholar, American Enterprise In-

stitute for Public Policy Research.

1Eliot Jones, for example, remarks that,

"In

1904 there were

some seventy-fiveindependent refiners alltold.. . . Hadthetotal

independent output been concentrated in a few largerefineries, com-

petition with the Standard Oil Company would havebeen much more

vigorous and successful." The

Trust

Problem

in

the United States

59 (1929).George Stigler has pointed out that, "When the Sherman

Act

...

was passedin 1890, mosteconomists and most non-economists

believed

that

an industry with amodest number of firms couldbe

tolerably competitive.""TheChangingProblemof Oligopoly," Pro-

ceedings of theMontPelerin Society 3 (1966).

•"The key to the situation is theposition of theconsumers, rather

than

that

of theproducers.Haseveryconsumerachoice of efficient

and independent producers to buyfrom Y

If

so, there is no monopoly,

even ifone combinationshouldcontrolthreequarters of the output."

J. B. Clark and J.M. Clark,The Oontrol of Trusts 184-5 (1912).

3S1

382

THE

ANTITRUST

BULLETIN

(Some expressed approval of such combinationsin termsof

the economies that would berealized.)"

J.

B. Clark, forex-

ample, pointed to the power of potential competition to pro-

duce the same competitiveresult as a larger number of firms

or noncolluding behavior of a few, saying:

Let any combination of producers raise the prices be-

yond a certain limit, and

it

will encounter this difficulty.

The new mills

that

will spring intoexistencewill break

down prices; and the fear of thesenew mills,without

their actual coming, isoften enough to keep prices from

rising to an extortionate height.The mill

that

has never

been built is already a power in the market: forit will

surely be built under certain conditions, the effectof this

certainly is to keep prices down,"

Even Professor Jones, who believed inthenecessityof

active government intervention to break up trusts because

they wouldseek to maintain unfairly high prices,provides

evidence of thefailure of the trusts toaccomplish their objec-

tive.He lists a number which failedfinanciallyand were

voluntarily dissolved.

In

addition, he mentionsothers which

were unable tokeep thedominant position required to main-

tain prices above the competitivelevel when theyattempted

to do so.-

Professor A. S. Dewing undertook an empirical analysis

to determine whether or not any advantages accrued to "large

scale enterprises brought about through combination-the

so-called 'trusts.'

"6

Choosing

"a

random selectionof thirty-

8H. R. Seager, Introduction to Economics 150 (1905); C. J.

Bullock, Introduction to the

Study

of Economics 178 (1908); F. W.

Taussig, Principles of Economics i,

53-55

(1915); E. R. A. Seligman,

Principles01 Economics345 (1921).

~

J. B. Clark, The Control ofTrusts 13 (1901).

lS Eliot Jones, supra note 1,

at

538-540.

6A. S. Dewing, "A Statistical Test of theSuccessof Consolida-

tions," 36 Quarterly Journal ofEconomics 84 (1921-22).