Differential efficiency, market structure and price
A persistent question in industrial economics is the underpinning of the link between market concentration and price. How much of the link can be attributed to market power and how much to market efficiency? This paper develops a theoretical model to address that question. Applied to the US portland cement industry, the model indicates that both impacts matter. In relative terms, however, the market power effect is twice as large as the efficiency effect. An implication for merger policy is that the beneficial efficiency effects of mergers may not be obtained without the detrimental market power effects as well.
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