Aren't search/trade costs a proxy for the market in question though? For example, suppose prior to the internet, you had two bookstores in your town. That was your relevant bookstore competition market. With Internet and delivery (lower search and trade costs), your relevant market is now bigger, basically the whole US.
So before, every town had two bookstores, thus nation wide competition would be seen as large (low concentration). But locally it would be a duopoly. Now with Internet, suppose we have Amazon and B&N, as the only bookstores. This is again a duopoly from the perspective of the town dweller.
Measuring market concentration change here is influenced by the relevant market changing, which means this is no longer an apples to apples comparison. You probably wouldn't have wanted the two bookstores (pre-internet) to merge at the time. One could argue that for the US the search and trade costs have been close to minimized.
Absolutely, it can cause you to change the market for many questions. But fix the market definition ahead of time in a way that can account for the change. Fix the definition as "the grocery market" or "the book market."
In his example with Internet and delivery though, it's still talking about local markets. Food, unlike books, can pretty much only be delivered locally for your regular consumer.
I also think I agree that the search and trade costs for most goods (not you, labor market) are close to minimized, and in some sense I think they can be endogenous to the relevant market. But if the relevant market for a lot of goods is already the entire US (except for some goods that don't apply to this), wouldn't the argument still stand?
The example I had in mind was the following. Suppose you have two cities with 3 companies each - City 1 with A,B,C and City 2 with X,Y,Z. Due to high trade/transport/search costs the markets are basically closed to each other. From a national perspective there are 6 companies Suppose company X buys company A. From a consumer perspective, this may have no adverse impact, as each city will still have 3 firms. Now due to technology there is a reduction in trade/transport costs, the markets basically open up and each firm can easily compete in each city. We would have two potential things occur here: 1) had the acquisitions not been allowed, there would have been 6 potential competitors rather than the current 5 ; 2) if company Y were to now att
empt to purchase B, we would be concerned about concentration risk, moving from 5 to 4 companies, as it may potentially impact consumers adversely. Prior to the opening of both economies to each other, consumers would not be adversely affected if Y attempted to purchase B.
This is obviously a stylized example. But, to me, it raises the question what we think the appropriate market measure is. I simplified it with a geographical example but we can think of 'cities' as currently seemingly unrelated industries (for example Google search when they bought YouTube, a video host).
If we determine the market to be cities, as in the example above, then acquisitions have no adverse consequence. But if we think nationally, there may be consequences. But how could we have known that the two cities would open up to trade?
I would be interested to also test the relationship to new entry decisions: if a market is very competitive and prices are closest to marginal cost then entry looks unappealing, therefore number of firms is monotonicly downward. If a market is less competitive then price will be well above marginal cost and lots of new entrants will show up, thus biasing the number of firms upward.
Entry is an important factor. Absolutely. And you need to be careful about accounting for that as a possible source of bias (say if you're estimating productivity). That's why all of these models (Melitz or Syverson) include entry. They account for that.
On the profits point, remember, competition means marginal profits are low. It doesn't mean overall profits are low. Overall profits is what matters for entry.
Aren't search/trade costs a proxy for the market in question though? For example, suppose prior to the internet, you had two bookstores in your town. That was your relevant bookstore competition market. With Internet and delivery (lower search and trade costs), your relevant market is now bigger, basically the whole US.
So before, every town had two bookstores, thus nation wide competition would be seen as large (low concentration). But locally it would be a duopoly. Now with Internet, suppose we have Amazon and B&N, as the only bookstores. This is again a duopoly from the perspective of the town dweller.
Measuring market concentration change here is influenced by the relevant market changing, which means this is no longer an apples to apples comparison. You probably wouldn't have wanted the two bookstores (pre-internet) to merge at the time. One could argue that for the US the search and trade costs have been close to minimized.
Absolutely, it can cause you to change the market for many questions. But fix the market definition ahead of time in a way that can account for the change. Fix the definition as "the grocery market" or "the book market."
In his example with Internet and delivery though, it's still talking about local markets. Food, unlike books, can pretty much only be delivered locally for your regular consumer.
I also think I agree that the search and trade costs for most goods (not you, labor market) are close to minimized, and in some sense I think they can be endogenous to the relevant market. But if the relevant market for a lot of goods is already the entire US (except for some goods that don't apply to this), wouldn't the argument still stand?
The example I had in mind was the following. Suppose you have two cities with 3 companies each - City 1 with A,B,C and City 2 with X,Y,Z. Due to high trade/transport/search costs the markets are basically closed to each other. From a national perspective there are 6 companies Suppose company X buys company A. From a consumer perspective, this may have no adverse impact, as each city will still have 3 firms. Now due to technology there is a reduction in trade/transport costs, the markets basically open up and each firm can easily compete in each city. We would have two potential things occur here: 1) had the acquisitions not been allowed, there would have been 6 potential competitors rather than the current 5 ; 2) if company Y were to now att
empt to purchase B, we would be concerned about concentration risk, moving from 5 to 4 companies, as it may potentially impact consumers adversely. Prior to the opening of both economies to each other, consumers would not be adversely affected if Y attempted to purchase B.
This is obviously a stylized example. But, to me, it raises the question what we think the appropriate market measure is. I simplified it with a geographical example but we can think of 'cities' as currently seemingly unrelated industries (for example Google search when they bought YouTube, a video host).
If we determine the market to be cities, as in the example above, then acquisitions have no adverse consequence. But if we think nationally, there may be consequences. But how could we have known that the two cities would open up to trade?
I would be interested to also test the relationship to new entry decisions: if a market is very competitive and prices are closest to marginal cost then entry looks unappealing, therefore number of firms is monotonicly downward. If a market is less competitive then price will be well above marginal cost and lots of new entrants will show up, thus biasing the number of firms upward.
Entry is an important factor. Absolutely. And you need to be careful about accounting for that as a possible source of bias (say if you're estimating productivity). That's why all of these models (Melitz or Syverson) include entry. They account for that.
On the profits point, remember, competition means marginal profits are low. It doesn't mean overall profits are low. Overall profits is what matters for entry.