Market Concentration and Economic Theory

The economics of market concentration and antitrust law have a long-lasting tradition of fruitful interaction. In static neoclassical theory, market concentration - irrespective of the reasons of it – was considered harmful. Later, adherents of the Harvard School correctly observed a relationship between industry concentration and profits, but erroneously inferred that those profits were the result of artificial market power. In contrast, researchers working in the tradition of the Chicago school maintain that high profitability in a concentrated industry has to be interpreted as a reflection of superior efficiency of larger firms over smaller ones, not as a reflection of market power. Post-Chicago economists developed new game theoretic models and stated that the efficiency explanations of the Chicago School were insufficient and inadequate explanations of firm conduct or market structure. More recent, proponents of innovation school believe that there can be many instances where the losses in allocation inefficiency will be small and dwarfed by the gains in productivity and innovation.