THE PAKISTAN DEVELOPMENT REVIEW
Some New Evidence on Concentration and Profitability in Pakistan’s Large-Scale Manufacturing Industries
The purpose of this paper is to estimate the extent of industrial concentration in the major manufacturing industries and to analyse its effects on some standard behavioural aspects of oligopoly. Basically, it tests the hypothesis that excessive control of a market removes the pressure on monopolists to keep prices down to their competitive levels and thus generates excessive or ‘monopoly profits’. Such behaviour by the oligopolist can be further split into a price-behavioural effect and a production effect . According to the former, prices tend to be sticky as the oligopolist can effectively control output to influence market price. The production effect, on the other hand, implies that during a slowdown in economic activity, there is greater curtailment of output and a smaller reduction in price of products produced by more concentrated industries (henceforth referred to as MCIs). This tendency of a monopolist to restrict output and charge higher prices is generally described as one of the static alloca-tive effects of monopolistic competition and has welfare implications, in that, it leads to a sub-optimal allocation of resources.1 For a developing country (LDC) like Pakistan, where there is an acute shortage of manufactured goods, this restriction has obvious drawbacks.