The Rise of Dominant Firms: The Role of Chance

Saha Atanu (), Havenner Arthur and Rauschenbach Sonya
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Saha Atanu: Econ One, New York, UNITED STATES
Havenner Arthur: University of California, Davis, United States
Rauschenbach Sonya: Etsy, New York, United States

Open Economics, 2019, vol. 2, issue 1, 76-91

Abstract: The principal explanations in the existing economics literature for the formation of concentrated markets are intellectual property-related entry barriers, economies of scale, and network effects. In each of these explanations, a few firms have an inherent advantage, allowing them to maintain their dominance. Our study’s objective is to show that even when all firms are equally situated, an industry can evolve from a competitive to an oligopolistic structure purely as a result of random chance. We create a stylized model where firms are identical at inception, with none having any competitive advantage. In each period, a firm’s profit is random with zero mean. The randomness of profits is hypothesized to stem from demand uncertainty and production cost fluctuations. Simulation results show that, solely as a result of chance, a competitive industry transitions to a market structure where only a handful dominate. The antitrust implications of our paper pertain to the causes of oligopoly formation. Notwithstanding that in some cases oligopolies can arise as a result of anticompetitive behavior of firms, we show that market concentration can also occur as a benign, natural consequence of evolution of an industry characterized by firms with uncertain profits.

Keywords: industry concentration; random chance; antitrust (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:openec:v:2:y:2019:i:1:p:76-91:n:8

DOI: 10.1515/openec-2019-0008

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