Explaining the Concentration-Profitability Paradox
University of the West Indies at Mona, Department of Economics
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.
Number of Pages in PDF File: 50
Keywords: Classical Political Economy, Competition theory, industrial organization, industry market share concentration, profitability
JEL Classification: B51, D24, D40, L11
Date posted: December 5, 2016 ; Last revised: December 12, 2016