The Transition of Market Structure in Russia: Economic Lessons and Implications for Competition

This paper has three main objectives. First, using a wide variety of indicators, we examine how the industrial structure of Russia is changing during transition. We analyze what the implications of these changes are for potential competition. We then investigate the economic processes that direct these changes and econometrically test several hypotheses, put forward by Sutton (1991) and others, concerning the determinants of market structure. We find that Russian industrial structure is indeed experiencing dramatic changes. The size distribution of firms is generally converging to that found in the United States. Manufacturing concentration is increasing on average, but these averages mask huge structural changes. Product concentration is decreasing. Considered together, the various structural changes suggest that the potential for competition is actually improving. Central planning factors still partly explain the observed levels of concentration. We find no systematic differences between Soviet Russian concentration and market equilibrium concentration. We find no evidence that Russian industry concentration is converging to U.S. industry concentration. The evidence strongly suggests that the economic processes directing increases in concentration are different from those directing decreases and that the processes determining market structure in exogenous sunk cost industries are different from those in endogenous sunk cost industries. The individual determinants of changes in concentration tend support to several other hypotheses theoretically developed by Sutton (1991).