The market power versus the differential efficiency ambiguity: a discrimination theory

Abstract

This paper constructs a framework for distinguishing between the differential efficiency versus the
market power hypotheses regardless of whether the relationship between industry and/or firm profitability
and concentration and/or market share is positive or negative. This is made possible by the establishing
of criteria which express the two hypotheses as mutually exclusive either at the firm level or, if this is
not possible, at the industry level. These criteria are based on whether the production is characterised by
increasing or decreasing returns to scale and on the magnitudes of the gap in efficiency and the gap in
collusion between efficient (innovating) and non efficient (laggard) firms respectively.