Oligopoly 359prices for consumer goods and materials (and a smaller positive effect for cap-
ital and producer goods).^4
Is an increase in monopoly power necessarily harmful to the interests of
consumers? The foregoing discussion citing the evidence of higher prices
would say yes. However, an alternative point of view claims that monopoly (i.e.,
large firms) offers significant efficiency advantages vis-á-vis small firms.^5
According to this hypothesis, monopoly reflects superior efficiency in product
development, production, distribution, and marketing. A few firms grow large
and become dominant becausethey are efficient. If these cost advantages are
large enough, consumers can obtain lower prices from a market dominated by
a small number of large firms than from a competitive market of small firms.
Thus, a price comparison between a tight oligopoly and a competitive market
depends on which is the greater effect: the oligopoly’s cost reductions or its
price increases. For example, suppose that in the competitive market PcACc,
and, in the tight oligopoly Po1.15ACo. Absent a cost advantage, the oligop-
oly exhibits higher prices. But if the oligopoly’s average cost advantage exceeds
15 percent, it will have the lower overall price.
The evidence concerning monopoly efficiency is mixed at best. It is hard to
detect significant efficiency gains using either statistical approaches or case stud-
ies. Large firms and market leaders do not appear to be more efficient or to
enjoy larger economies of scale than smaller rivals. (They do profit from higher
sales and prices afforded by brand-name allegiance.) Nonetheless, the efficiency
issue offers an important reminder that greater concentration per se need not
be detrimental. Indeed, the government’s antitrust guidelines mentioned ear-
lier cover many factors—concentration, ease of entry, extent of ongoing price
competition, and possible efficiency gains—in evaluating a particular industry.(^4) See C. Kelton and L. Weiss, “Change in Concentration, Change in Cost, Change in Demand, and
Change in Price,” in Leonard Weiss (Ed.), Concentration and Price. (Cambridge, MA: MIT Press, 1989).
This book provides a comprehensive collection and critical analysis of the price-concentration research.
(^5) This view often is referred to as the University of Chicago-UCLA approach,because much of the research
originated at these schools. For discussion and critique, see M. Salinger, “The Concentration-Margins
Relationship Reconsidered,” Brookings Papers: Microeconomics (1990): 287–335.
Fares on air routes around the world offer a textbook case of the link between
concentration and prices. Numerous research studies have shown that average
fares on point-to-point air routes around the globe vary inversely with the num-
ber of carriers. Indeed, the degree of competition on a particular route is a
much stronger predictor of airfares than the distance actually traveled.
The effect of competition can be seen in several ways. Airline deregula-
tion in the United States began in 1978. Fares were deregulated, and air
routes were opened to all would-be carriers. In the first decade of deregula-
tion, the average number of carriers per route increased from 1.5 to almost
- During the same period, deregulated fares proved to be about 20 percent
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