Industry concentration-profitability relationship and competition policy: is there a critical concentration level?

Abstract

The critical concentration hypothesis that there exists a threshold level of concentration which separates industries into two regimes in terms of profits has been tested empirically using the single-equation approach, ignoring the simultaneity involved in the determination of profits across industries. The majority of previous studies found supportive evidence for the hypothesis. This paper employs a simultaneous equation model to examine the concentration-profitability relationship and casts serious doubt on the existence of any such critical threshold.