A note on dominant firm market share and economic performance
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The hypothesis of a positive concentration-profits relationship has been one of the most thoroughly tested in economics. Market share has been used in a number of these studies as a measure of horizontal dominance by a firm in an industry. Although these studies have shown empirically that a positive relationship exists between market share and rates of return, little theoretical evidence for this relationship exists.
The price leadership model can be used to show that a continuous, direct relationship exists between market share and competitive injury. From a simulation exercise based upon the price leadership model, a positive association is demonstrated between increasing market share of the dominant firm (or collusive leading firms) and increasing competitive injury (as evidenced by a greater divergence between the competitive versus price leadership price-output decisions). This exercise establishes market share as a fundamental structrual variable in describing the short run competitiveness within the industry.
The results of this model imply that intra-industry cross section studies, utilizing a carefully defined price leader(s) and price followers dictomy, should yield better statistical fits. At the present stage of empirical testing, however, only the roughest approximations using rather arbitrary definitions of the price leader-follower dichotomy have been made.
KeywordsMarket Share Economic Performance Industrial Organization Empirical Testing Section Study
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