Many economists think of monopoly and competition as two polar cases, with the real world lying somewhere in between, and the degree of concentration measures whether a particular industry lies closer to one extreme or the other. The closer an industry is to the monopolistic end of the spectrum the more monopolistic characteristics will be observed, the higher prices will be relative to costs, the greater the resulting resource misallocation and welfare losses. This view has some plausibility, but it is much too vague to be considered a useful economic theory or to provide a satisfactory basis for empirical work. (This has not, however, prevented the proliferation of empirical studies in this area more or less devoid of theoretical underpinning). We must look more carefully at the ways in which high concentration might affect the relationship between prices and costs.
KeywordsNash Equilibrium Market Share Small Firm Large Firm Modern Industry
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