Explaining the Concentration-Profitability Paradox

50 Pages Posted: 5 Dec 2016 Last revised: 12 Apr 2017

Jan Keil

University of the West Indies at Mona, Department of Economics

Date Written: December 1, 2016

Abstract

This paper explains an empirical paradox which is often found, but generally ignored: a significant negative econometric relationship between profitability and market share concentration. The phenomenon can appear when there is a negative correlation between market share and costs - for example due to economies of scale. I show that concentration becomes an indicator for the cost competitiveness of direct rivals within an industry. Profitability of a given firm is undermined if price correlates positively with average industry costs (Classical natural prices) and frictions like sunk costs make an industry exit expensive for firms. This idea also explains the frequent findings of highly persistent profit rate differentials.

Keywords: Classical Political Economy, Competition theory, industrial organization, industry market share concentration, profitability

JEL Classification: B51, D24, D40, L11

Suggested Citation

Keil, Jan, Explaining the Concentration-Profitability Paradox (December 1, 2016). Review of Political Economy, 2017. Available at SSRN: https://ssrn.com/abstract=2879050 or http://dx.doi.org/10.2139/ssrn.2879050

Jan Keil (Contact Author)

University of the West Indies at Mona, Department of Economics ( email )

Kingston
Jamaica

HOME PAGE: http://sites.google.com/site/drjankeil

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