The Aggregate Relation between Profits and Concentration is Consistent with Cournot Behavior

29 Pages Posted: 13 Nov 1996

See all articles by Raymond D. Sauer

Raymond D. Sauer

Clemson University - John E. Walker Department of Economics; National Bureau of Economic Research (NBER)

Micha Gisser

University of New Mexico - Department of Economics

Date Written: October 1996

Abstract

An important and controversial stylized fact in industrial organization is the positive correlation between industry profit and concentration. There are many interpretations of this finding. One view is based on the classic theories of Chamberlin and Stigler, which imply that concentrated industries facilitate collusion, leading to supernormal profits. But independent, profit maximizing behavior in the Cournot model can also generate the positive correlation. A second fact--that intra-industry profit rates are correlated with market share--is the basis for an alternative interpretation of the first. In this paper we present an equilibrium model of oligopoly which generates these two implications and nests the classic behavioral assumptions of Bertrand, Cournot and Chamberlin. Among the alternative models we find that the Cournot version implies regression coefficients for the profits-concentration relation that are very close to the estimated coefficients in the empirical literature. Thus, what many regard as the benchmark model of oligopoly is consistent with one of the principal findings of the empirical literature.

JEL Classification: L16, L2, L13

Suggested Citation

Sauer, Raymond D. oSkipo and Gisser, Micha, The Aggregate Relation between Profits and Concentration is Consistent with Cournot Behavior (October 1996). Available at SSRN: https://ssrn.com/abstract=1505 or http://dx.doi.org/10.2139/ssrn.1505

Raymond D. oSkipo Sauer (Contact Author)

Clemson University - John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States
864-656-3939 (Phone)
864-656-4192 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Micha Gisser

University of New Mexico - Department of Economics ( email )

1915 Roma NE/Economics Building
Albuquerque, NM 87131
United States
505-277-2420 (Phone)

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