Monopolisation and industry structure

The aim of this paper is to provide empirically testable predictions regarding the relationship between market size and concentration. In the first part of the paper, a model of endogenous horizontal mergers is investigated. It is shown that concentrated outcomes can not be supported in a free entry equilibrium in large exogenous sunk cost industries: the upper bound to concentration tends to zero as market size (relative to setup costs) tends to infinity. In contrast, arbitrarily concentrated outcomes may be sustained in endogenous sunk cost industries, no matter how large the market, and even in the absence of mergers; that is, the upper bound to concentration does not decrease with market size. The second part of the paper formalises Stigler's idea that mergers may induce new entry. Using a recent equilibrium concept, which is defined not in the space of strategies, but in the space of observable outcomes, it is shown that the above predictions do not depend on the details of the extensive form of the game, even allowing for side payments between firms and endogenous product choice. The results complement those of Sutton (1991) on the stability of fragmented outcomes