Concerns regarding corporate concentration have been a recurrent theme in Korean public policy since the Fair Trade Law was enacted in 1981.

Corporate concentration embodies at least four distinct concept: aggregate concentration, conglomeration, ownership concentration, and market concentration. Among them market concentration and the resulting inefficiency in resource allocation has been the major concern of most mainstream economists. The discussion in Korea, however, have tended to be misguided by focusing on equity and chaebol hegemony rather than efficiency arguments. This might explain why the Korean public policy has given much more weight on restraining aggregate concentration and conglomeration of the 30 largest chaebols.

As I have shown in another book, however, aggregate concentration is not a Korean-specific phenomenon. When the 30 chaebols are directly compared with the OECD countries' 30 largest firms, the employment-based aggregate concentration ratio remains relatively low in Korea; i.e. Korea 18.5%, U. S. A. 22.9%, Germany 31.7%, and U. K., 32.6%. It should be also noted that if increases in aggregate concentration do not indicate increases in market concentration, then attention should not be paid to them. Moreover the public policy targeting the sizes of domestic firms only will not fit the changing environment of global competition.

All the above facts being taken into consideration, we need to move our concerns from aggregate concentration to market concentration. Under this background this book deals with the issues on market concentration. More specifically this book examines three important questions regarding the relation between market structure and social efficiency.  First, how large are the social costs of imperfect competition in the Korean manufacturing sector? Are they large enough for the government to intervene vigorously in market mechanism? Previous literatures on this issue have concerned themselves with the costs of monopoly. But it is a well-known fact that monopoly is the exceptions rather than the rules. For this reason the estimation here is based on the imperfect competition model in which monopoly becomes a special case. 

Second, what correlations exist there between the social costs and concentration indices such as Herfindahl index and CRk? These indices measure market structure-generally size distribution of firms at a point in time. While it has been recognized that measures of market structure provide only a proxy for the intensity of competition, they are often used by public policy economists in the formulation and the administration of competition policy. So by dealing with this second question this study tests the hypothesis that concentration indices are the reliable indicators of market power. It should be noted that most literatures have tested the hypothesis only in a indirect way by looking at the relation between concentration indices and profit rates. 

Third, are concentration indices good substitutes for mobility indices? The Austrian school holds that competition is best characterized as a process; in contrast, the structuralist school postulates that competition is a state of affairs. Mobility statistics are direct measure of the intensity of competition. They reflect the process that takes place within an industry as firms enter and exit, grow and decline. But concentration measures reflect the state of affairs and are indirect proxies of the same phenomenon. Because of the widely held beliefs among structuralist economists that concentration and mobility are closely related, however, previous literatures pay little attention to mobility statistics. By dealing with the third question, this study tests whether these beliefs are empirically valid.

This study uses the firm data during the year 1991∼1995. The data come from Annual Reports of Korean Companies published by Korea Productivity Center. Each firm here is placed into one of the KSIC 2-digit industries according to its core activity. This study measures various indicators of market structure, mobility statistics, and social costs and examines the correlation among three different measures. The results are summerized in the following.

1. The social costs of imperfect competition vary from 0.12% to 2.89% of GNP depending on how to define the social costs. When we follow the tradition to define the social costs as the traditional welfare triangle, the social costs range from 0.12% to 0.23% of GNP. When we modify the welfare triangle by incorporating internal efficiency, they amount to 0.15%∼0.28% of GNP. Following the Leibenstein's X-inefficiency hypothesis, they amount to 1.23%∼1.36% of GNP. Finally adopting the extreme assumption of rent-seeking hypothesis that all the profits are dissipated, they amount to 2.76%∼2.89% GNP.

2. A small set of industries is responsible for the lion's share of the social costs.  Following the definition of the traditional welfare triangle, for example, this study shows that 80% of the social costs comes from three industries including electronics and communication equipment(KSIC code 32), manufacture of basic metals(KSIC code 26), and manufacture of coke and refined petroleum products(KSIC code 23). This result does not vary much with which definition of the social costs are employed. Thus we might conclude that competition policy should pay more attention to these industries.

3. Concentration indices in general are unreliable indicators of market power. They has statistically significant relations with the traditional and the modified welfare criteria. They have no significant relation with the social costs based on both the X-inefficiency model and the rent-seeking model. Even when there is statistically significant relation, the correlation coefficient is at maximum 0.60. This magnitude is not sufficiently large especially when we consider the public policy economists' strong beliefs that there is almost one to one correspondence between concentration indices and market power. In other words the empirical finding in this study does not support the hypothesis of "concentration indices as the reliable indicators of market power."

4. There is no close relation between concentration indices and mobility statistics. Concentration indices show a statistically significant relation only with the entry/exit ratio among various mobility statistics. Even in this case the correlation coefficient is -0.5, which is lower than expected. Economists have believed that two different measures are good substitutes reflecting the extent of competition and thus it is just a matter of choice which one should be applied. But the empirical results imply that it might be misleading to judge the intensity of competition from market structure measures. Even the high concentrated indices are consistent with high mobility statistics like entry/exit ratio and market instability measure which mean that high intensity of competition. This study also shows that the entry/exit ratio and the social costs has correlation coefficient of -0.44. This imply that the concentration and mobility indices reveal different aspects of the competitive process. Thus in order to pinpoint those industries where competition problem arises, mobility statistics should be taken into consideration in addition to market structure measures.