Concentration versus Market Share: Which Determines Performance and Why Does it Matter?

• Author: Bradley T. Gale,Ben S. Branch
• DOI: 10.1177/0003603X8202700103
• Published date: 01 March 1982
• Date: 01 March 1982
• Subject Matter: Article

The Antitrust Bulletin/Spring 1982

Concentration versus market share:

which determines performance and

why does it matter?

BY BRADLEY T.

GALE·

and BEN S.

BRANCH··

83

The empirical research reviewed in this article has led us to

conclude that market share, not concentration, is the primary

structural determinant

of

profitability. Market share increases

profits through the benefits

of

scale economies. In contrast,

concentration affects profits by facilitating oligopolistic coor-

dination. We conclude therefore that scale economies are far

more powerful than oligopoly power in determining profit levels.

For this reason, we believe that provisions

of

our antitrust laws

based on the presumption that concentrated market structures

lead to resource misallocation (i.e., antimerger and antimonopoly

provisions of the Clayton and Sherman Acts) are misguided and

may well be leading to decreased efficiency.

The debate: market share versus concentration

Many industrial organization specialists have sought to find

empirical support for the proposition that concentrated market

••

Director of Research, Strategic Planning Institute.

Professor of Finance, University

of

Massachusetts.

AUTHORS' NOTE: Editorial assistance with this article was provided by

Ruth G. Newman.

©1982by Federal Legal Publications, Inc.

84 The antitrust bulletin

structures facilitate oligopolistic coordination and lead to monop-

oly-level prices.I

If

their analysis is correct, a weighted average

of

the profitabilities

of

all firms that comprise a concentrated

market should exceed the competitive norm, and should reflect

the degree

of

concentration that allows those firms to hold their

prices above the competitive level.

If,

as the proponents

of

this

view assume, most firms operate near the flat portion

of

their

cost curve and the burden of maintaining prices (excess capacity

absorption) falls most heavily on the higher-share participants,'

profits should vary primarily with concentration and little or not

at all with market share.

The opposing viewpoint' asserts that there are important scale

economies in working capital, marketing, research and develop-

ment and other cost components: economies

of

cumulative vol-

ume, which reduce unit costs via the experience-curve effect;'

economies due to spreading setup costs over longer production

runs; buyer preference based on the presumption that there is less

risk in dealing with the market leader; and potential savings

derived from greater bargaining power over both customers and

suppliers. SThe cost advantages resulting from these presumed

1H. Goldschmidt et al., Industrial Concentration: The New

Learning (Boston: Little, Brown, 1974), pp. 184-223.

2L. Weiss, Economics and American Industry (New York: John

Wiley &Sons, 1961).

3Goldschmidt, supra note 1, at 16-54, 55-104; F. Scherer et al.,

The Economics

of

Multi-Plant Operation (Cambridge, Mass.: Harvard

University Press, 1975).

4Boston Consulting Group, Perspectives on Experience (Boston:

Boston Consulting Group, 1972).

5These latter two advantages represent transfers favoring higher-

market-share businesses, as opposed to true efficiencies stemming from

larger-scale operations. This distinction between transfers and true

efficiencies illustrates the importance

of

going beyond the mere deter-

mination of a profitability/market share relation to ascertain the

sources of the differential profitability.