Most Antitrust Agencies across the world use market concentration as a proxy for

Question

Most Antitrust Agencies across the world use market concentration as a proxy for market power. There is a clear theoretical way to derive the relationship between market concentration (The Herfindahl Hirschman Index) and market power (Lerner Index) out of a Cournot oligopolistic model. Despite this, we’ve come across several cases throughout the semester in which this relationship didn’t seem so clear. Please list the assumptions used in deriving this relationship and why that may not be the case when trying to assess empirically.

Explanation / Answer

There are following assumptions regarding the relationship between market concentration and market power:
1.   Market concentration brings monopolist tendency of setting up prices and output
2.   Market concentration brings restrictive trade practices that are against the fair competition
3.   It brings allocative and productive inefficiencies
4.   It creates the scope to put the other smaller players out of the market
5.   It devoid the consumers from selecting the best among all the alternatives
6.   It will create illegitimate barriers to the entry for the new players

It may not be the case because market concentration in the form of a merger and acquisition also brings efficiency and productivity in the industry. It also brings competitiveness and attraction to the industry and new big firms can join the industry. With merger or acquisition, the firms complement each other and move ahead in the value chain. It serves well in the market and consumers can get better product and services. Hence, the assumption of increase in market concentration may not lead to the increase in market power in all cases.

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