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Concentration‐Profits Monopoly Vs. Efficiency Debate: South African Evidence

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  • DANIEL F. LEACH

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.

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  • Daniel F. Leach, 1997. "Concentration‐Profits Monopoly Vs. Efficiency Debate: South African Evidence," Contemporary Economic Policy, Western Economic Association International, vol. 15(2), pages 12-23, April.
    • Handle: RePEc:bla:coecpo:v:15:y:1997:i:2:p:12-23
    DOI: 10.1111/j.1465-7287.1997.tb00461.x
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    References listed on IDEAS

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    Cited by:

    1. Aldaba, Rafaelita M., 2008. "Emerging Issues in Promoting Competition Policy in the APEC and ASEAN Countries," Discussion Papers DP 2008-02 (revised), Philippine Institute for Development Studies.
    2. Edward Nissan & George Carter, 2011. "The Largest Trans-nationals of Developing Economies," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 39(1), pages 71-83, March.
    3. Joshua Budlender, 2019. "Markups and market structure in South Africa: What can be learnt from new administrative data?," WIDER Working Paper Series wp-2019-58, World Institute for Development Economic Research (UNU-WIDER).

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