The Debate Over Industrial Concentration

The effect of market power on the cconomy can be studied using the idea of industrial concentration, which refers to the domination of a market by one or a few large companies. Because of their small numbers and great sizes, these companies possess significant market power. Can industrial concentration work to the advantage of consumers? To answer this question, we must weigh the costs and the benefits of huge companies dominating a given market.

INCREASING RETURNS TO SCALE VERSUS MARKET POWER

Defenders of industrial concentration emphasize the role of increasing returns to scale. They say this is especially important in a time when businesses are more likely than ever to compete in huge global markets. In many industries, only large businesses with a substantial market share can produce the quantity of output necessary to take advantage of increasing returns to scale. As a result, these big businesses have lower per-unit costs than would competitive businesses in the same market, These cost savings may then be passed on to consumers in the form of lower prices. Critics of industrial concentration say that the benefits of increasing returns to sca must be weighed against the market power held by large monopolists and oligopolists. This market power allows big companies to charge a higher price than would occur with more competition in the market.

INNOVATION

Some economists argue that "big business" is needed to promote innovation and technological advances. Others support the opposite conclusion: that companies in highly concentrated industries-either monopolies or oligopolies-tend not to innovate as rapidly as those in more competitive markets, where the continual jockeying for profit encourages improvements in products and production processes. Evidence is mixed, and often depends on the extent to which large financial outlays (which "big business" can afford) are needed for successful innovation.

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