Rev Ind Organ (2008) 32:19–33
Lower Bounds of Concentration in a Small Open
Published online: 17 April 2008
© Springer Science+Business Media, LLC. 2008
Abstract We examine how Sutton’s “bounds” approach works in a small country
where industries have relatively high export and import intensities. The bounds are
estimated as stochastic frontiers, where observable industry characteristics, entry bar-
riers, and export intensity are allowed to affect the mean and variance of the deviations
from the frontier. In accordance with the theory, high R&D intensity industries have
a lower bound for concentration, which is higher than that for exogenous sunk cost
industries. For high advertising industries the theory does not hold as well.
Keywords Concentration · R&D · Stochastic frontiers · Sunk costs
JEL Classiﬁcation L11 · L13 · L60
During the heyday of the structure-conduct-performance (SCP) paradigm concen-
tration was explained by entry barriers and measures of product differentiation, like
advertising intensity or R&D intensity, among other variables (see, e.g., Davies 1989).
In the open economy context concentration ratios were explained also by export and
import intensities, or the concentration ratios were adjusted for exports and imports.
The analysis of market structure has gained new interest since the 1990s. One major
factor behind this has been the research of Sutton (1991, 1998, 2007). He has devel-
oped theories on what determines a lower bound for concentration. The emphasis in
empirical work is then not in explaining the actual level of concentration in different
P. Ilmakunnas (
Helsinki School of Economics, P.O. Box 1210, 00101 Helsinki, Finland