Review of Industrial Organization 19: 295–303, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
The Effect of Industry Concentration on Free
WEN MAO and PETER ZALESKI
Department of Economics, Villanova University, Villanova, PA 19085, U.S.A.
Abstract. The conventional wisdom regarding industry concentration and cooperative behavior has
not been fully supported by the empirical literature. This paper develops a game-theoretic model
to explain these mixed results. In the context of an industry that lobbies the government for tariff
protection, the model shows that the difﬁculty of enforcing a cooperative agreement is a function of
not only the number of ﬁrms in the industry but also the rate of return to lobbying. Thus, when the
rate of return to lobbying expenditures is high, the expected relationship may break down.
Key words: Free riding, industry concentration, trigger strategy.
JEL Classiﬁcations: C72, L10.
The theoretical relationship between free riding on cooperative agreements and
industry concentration is fairly well established. Prior to the classic work by Olson
(1965), political scientists believed that individuals with a common interest would
voluntarily contribute toward that common interest. Olson argues that individual
agents will voluntarily contribute to the collective activity as long as the private
marginal beneﬁt exceeds the private marginal cost. The same logic applies to ﬁrms
within an industry working toward some industry-wide good such as a tariff. If the
number of ﬁrms is large, the total beneﬁt is likely to be unaffected by any individual
ﬁrm’s behavior, hence the private marginal beneﬁt is viewed to be zero. In this case,
individual ﬁrms have no incentive to cooperate, and free-riding is likely to occur. If
the number of ﬁrms is relatively small, then cooperative agreements are more easily
enforced, and the individual ﬁrm may be unable to free-ride. Thus, the occurrence
of free-riding will decrease as industry concentration increases.
Now that this relationship of free-ridership and concentration has become the
conventional wisdom, its empirical validity has come into question. For example,
the theory predicts a positive relationship between industry concentration and the
The authors thank Subhashis Raychaudhuri, William Shepherd, and two anonymous referees
for their helpful comments. All errors and omissions are the authors’.