CONCENTRATION‐PROFITS MONOPOLY VS. EFFICIENCY DEBATE: SOUTH AFRICAN EVIDENCE

Daniel F. Leach

Contemporary Economic Policy, 1997, vol. 15, issue 2, 12-23

Abstract: Using the new official measures of concentration, this study finds a strong and highly significant correlation between concentration and industry profitability for South African manufacturing industries. This correlation is consistent with both the monopoly hypothesis of the traditional structure‐conduct‐performance paradigm and Demsetz's efficiency hypothesis that concentration of industry reflects the dominance of superior low‐cost firms. Using the four‐firm concentration ratio, this study applies Chappell and Cottle's extension of the Demsetz test to distinguish between the monopoly explanation of this correlation and the efficiency explanation. Using a conventional regression specification of the concentration‐profits relationship with no control for efficiency, this study finds a statistically significant coefficient only for the industry and large size class regressions. Because small firms should do at least as well as large firms, under the price umbrella provided by large firms, this result is inconsistent with the monopoly hypothesis but consistent with the efficiency hypothesis. Specifying a variable that measures the efficiency of large plants relative to smaller plants—the cost advantage ratio—yields striking results. Similar to the results obtained by Chappell and Cottle for the United States, this study finds the efficiency variable to be highly significant in the industry and large size class regressions, while concentration becomes insignificant. Moreover, the efficiency variable is insignificant in the smaller size classes Both the statistical insignificance of concentration and the pattern of the efficiency variable coefficients suggest that including concentration in the regression specification without the efficiency variable simply highlights the effect of the efficiency variable. Coming as they do from an environment as different from the United States as the South Africa of the 1980s, these results strongly support the Demsetz efficiency hypothesis.

Date: 1997
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://doi.org/10.1111/j.1465-7287.1997.tb00461.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:coecpo:v:15:y:1997:i:2:p:12-23

Ordering information: This journal article can be ordered from
https://ordering.onl ... 5-7287&ref=1465-7287

Access Statistics for this article

Contemporary Economic Policy is currently edited by Brad R. Humphreys

More articles in Contemporary Economic Policy from Western Economic Association International Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().