Concentration and Profits: Does Concentration Matter?

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

CONCENTRATION AND

PROFITS:

DO,ES

CONCENTRATION

MAnER?

In

the post-World

War

II

period, the economics profes-

sion made a lSD-degree

turn

from its pre-Great Depression

position in its view of concentration.

In

the late nineteenth

and early twentieth centuries, the prevailing view seemed to

have been

that

even with only a few firms in an industry,

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 an industry's ca-

pacity or sales. Three or four firms were felt to be 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 Business Economics, 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-five independent refiners all told. . . . Had the total

independent output been concentrated in a few large refineries, com-

petition with the Standard Oil Company would have been 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 passed in 1890, most economists and most non-economists

believed

that

an industry with a modest number of firms could be

tolerably competitive." "The Changing Problem of Oligopoly," Pro-

ceedings of the Mont Pelerin Society 3 (1966).

•"The key to the situation is the position of the consumers, rather

than

that

of the producers. Has every consumer a choice of efficient

and independent producers to buy from Y

If

so, there is no monopoly,

even if one combination should control three quarters 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 combinations in terms of

the economies that would be realized.)"

J.

B. Clark, for ex-

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

duce the same competitive result 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 into existence will break

down prices; and the fear of these new mills, without

their actual coming, is often enough to keep prices from

rising to an extortionate height. The mill

that

has never

been built is already a power in the market: for it will

surely be built under certain conditions, the effect of this

certainly is to keep prices down,"

Even Professor Jones, who believed in the necessity of

active government intervention to break up trusts because

they would seek to maintain unfairly high prices, provides

evidence of the failure of the trusts to accomplish their objec-

tive. He lists a number which failed financially and were

voluntarily dissolved.

In

addition, he mentions others which

were unable to keep the dominant position required to main-

tain prices above the competitive level when they attempted

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 selection of 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,

Principles 01 Economics 345 (1921).

~

J. B. Clark, The Control of Trusts 13 (1901).

lS Eliot Jones, supra note 1,

at

538-540.

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

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