Waterson, Michael --- "‘Price–Cost Margins and Market Structure’ Revisited" [2003] ELECD 84; in Waterson, Michael (ed), "Competition, Monopoly and Corporate Governance" (Edward Elgar Publishing, 2003)

Book Title: Competition, Monopoly and Corporate Governance

Editor(s): Waterson, Michael

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781843760894

Section: Chapter 5

Section Title: ‘Price–Cost Margins and Market Structure’ Revisited

Author(s): Waterson, Michael

Number of pages: 10

Extract:

5. `Price­cost margins and market
structure' revisited
Michael Waterson1

1. INTRODUCTION

In the summer of 1972, I forget whether for six or eight weeks, Keith
Cowling employed me on a project examining oligopoly. His original idea,
inspired by Means (1962), was that there was a link between oligopoly
behaviour and the rate of inflation. However, upon developing the model,
it became clear that the link in theory was between the change in the degree
of oligopoly and the change in pricing. I recall, when I returned to my
parental home, telling my mother what I had been doing over those weeks
­ developing a model ­ she thought it pretty poor value. In retrospect, I
cannot agree; indeed I wish I had spent a few weeks so productively more
often! Eventually, this translated itself, via my PhD and a lot of work by
Keith, into our joint paper, `Price­cost margins and market structure'
(1976) which remains clearly the most-cited piece either of us have.
The model was one of the early elements to provide a rigorous theoreti-
cal underpinning for the cross-sectional structure­performance work so
popular in industrial economics at that stage. It made two things clear,
that the appropriate margin was a margin on revenue, not capital, and
that an arguably appropriate measure of industry concentration was the
Herfindahl. This latter finding led to a great deal of policy-driven work (for
example Dansby and Willig, 1979; Farrell and Shapiro, 1990) and thus may
have been ...