ABSTRACT
In this chapter we examine the links between market structure, conduct and profitability. One possibility that has received much attention from economists is that high profits are the result of high market concentration. This may be because high concentration facilitates collusion, enabling the firms to achieve profits near to the joint profit-maximising outcome. In addition, firms in highly concentrated markets may be able to protect their positions by various forms of strategic behaviour, including, for instance, product differentiation and heavy advertising expenditure. An alternative explanation of a positive relationship between market structure and profitability is that this comes about not because of market power but because of the greater efficiency of large firms. Firms that are more efficient, perhaps because of superior innovative performance, will expand their market share at the expense of the less efficient. A positive correlation between high concentration and high profitability may thus simply reflect these efficiency differences.
