When economies of scale are impontant, there may be too many firms in a market to effectively exploit these scale economies. Although more firms imply reduced market power, this may not offset the adverse impact of higher unit cost. We explore this trade-off by estimating for 107 Canadian industries optimal concentration, this being the concentration that maximizes, for given firm conduct, producers and consumers' surplus. We then calculate deadweight losses as the difference between total surplus at optimal concentration and total surplus at current concentration levels. Among the conclusions are that the majority of industries have concentration that is too low.
Review of Industrial Organization – Springer Journals
Published: Sep 29, 2004
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