Willard F. Mueller

Trends in Industrial Market Concentration, 1947 to 1970

ECONOMISTS have been alternately fascinated and frustrated with industry or market concentration ratios ever since they were first calculated from census data for the Temporary National Economic Committee for 1937. They are fascinated because concentration ratios are the single best available index of the degree of oligopoly. The frustration stems from the absence of precise coincidence between the Standard Industrial Classification System (SIC) used by the Bureau of the Census and economically relevant markets. Yet, when all is said and done, most industrial organization economists agree that concentration ratios based on SIC industries not only are the best available, but provide useful measures of one dimension of the extent of oligopoly in American industry.1 This is not to imply, of course, that market concentration is the only index of oligopoly or market power. Economic theory suggests and empirical studies verify that entry barriers, product differentiation, firm conglomeration, among others, also may influence firm conduct and industrial performance. But changes in industrial concentration are uniquely significant because often they reflect, at least partially, changes in other structural variables as well. For example, if entry barriers are declining, because of growing markets or whatever, this tends to become reflected in lower concentration ratios. Hence changes in market concentration may also reflect what is happening to other structural variables affecting the discretionary power of sellers. We shall not here argue the question of whether or not concentration ratios are meaningful indices of market structure or whether they are causally related to industrial performance. Those assuming that the answer to both questions is yes, gain aid and comfort from the most comprehensive review of the empirical evidence on the subject.2

The Price and Profit Performance of Leading Food Chains

The net profits and grocery prices of large food chains were found to be positively and significantly related to market concentration and a chains relative market share. The results refute the notion that higher profits for dominant firms in concentrated markets are due to efficiency and lower costs. Increased profits in noncompetitively structured markets accounted for about one-third of the increase in prices. Higher retailer costs in noncompetitive markets appear to stem from inefficiencies and cost increasing forms of competition.

Market Structure and Performance of U.S. Multinationals in Brazil and Mexico

This paper presents the results of a regression analysis of the market structure determinants of profitability among the Brazilian and Mexican manufacturing affiliates of US multinational corporations. The study employs data on 206 firms derived from a special survey specifically designed to obtain detailed information on their market structure environments and performance characteristics. Our estimates confirm that seller concentration, product differentiation, and relative market share are three sources of market power of these firms. Despite the many economic and noneconomic differences between Brazil and Mexico, there are no systematic differences between the two in their underlying structure‐performance relationships.

Changes in market concentration of manufacturing industries

The impact on concentration of advertising and other variables is examined in a multiple regression model. The findings indicate that the positive influence of advertising observed for earlier periods continued during 1972–1977. By testing hypotheses suggested by other researchers, this paper resolves most, if not all, of the seemingly conflicting findings of researchers examining changes in concentration since 1963. The findings also strongly suggest that lagged models provide little, if any, added insight into the causes of changes in concentration.

An Empirical Test of the Free Rider and Market Power Hypothesis

This analysis tests the free-rider hypothesis as it applies to the Sealy mattress licensing system, one of the oldest and most prominent examples of vertical and horizontal distribution restraints. The results reported here focus on the period following the elimination of Sealys territorial restraints in 1980. Using alternative samples, units of measurement, and estimating techniques, the analyses yield consistent results supporting the market power hypothesis: the Sealy territorial restraints on distribution decreased output and increased prices. Copyright 1991 by MIT Press.

Market Power in the Cheese Industry: Further Evidence

The recent public disclosure of proprietary information providesinsights into the pricing conduct and performance of leadingcheese marketers. Most important, the evidence supports thehypotheses that following its acquisition by Philip Morris in1988, Kraft became particularly aggressive strategically,both byselling on the NCE to drive bulk cheese prices lower and byincreasing the selling prices and gross profit margins on theirfinished cheese. The result was significantly higher prices toconsumers and lower prices to suppliers of bulk cheese, as Kraftsgross profit margins rose from an estimated

Price Leadership on the National Cheese Exchange

880 million in1989 to

The bakers of Washington cartel: Twenty-five years later

1020 million in 1991.

Cyclical variation in the profit-concentration relationship

The motivation and trading behavior of the leading cheese companies on the National Cheese Exchange are examined. Although only 0.2 percent of all cheese is sold on the NCE, it is used to formula-price 90-95 percent of the bulk cheese in the U.S. Kraft General Foods, the largest buyer of cheese in the U.S., was the dominant seller on the NCE during 1988-1993, with the apparent purpose and effect of depressing national cheese prices. Krafts behavior is consistent with that of a barometric price leader that enjoys a significant degree of discretion in shaping the pattern of prices over a price cycle. As presently organized, the NCE facilitates market manipulation.

The influence of market structure on technological performance in the food-manufacturing industries

Craig M. Newmark challenges the findings of a 1965 Federal Trade Commission decision and Economic Report that a price fixing cartel increased bread prices in the state of Washington from the mid-1950s to 1964. Newmark believes prices were higher during the cartels existence because retailers in the west had higher margins and that bakers in the west had higher wages and higher ‘normal’ profits than elsewhere in the country. Newmark ignores evidence that the cartel had set the higher retailer margins in Washington and that the labor costs and profits of Washington bakers were not higher than elsewhere. The Washington bakers had inflated distribution costs and excess capacity prior to the cartels breakup. This result is commonplace when a cartel stimulates costly nonprice competition, so that the higher prices of the cartel members end up primarily in higher unit cost. Finally, Newmark claims that the reason prices fell in 1965 was the entry of a significant size price cutter, not the demise of the cartel. What Newmark characterized as a ‘principal’ entrant was actually a tiny, two-man operation, with less than a 1.0 percent market share. The record shows that this entrant did not trigger the precipitous price decline occuring when the cartel was destroyed.