Industry and financial market concentration

This paper elaborates upon the correlation of the Lerner indexes in industry and financial market. It is found that the concentration in this market encourages the entry of firms in the non-financial sector, ceteris paribus. Since, concentration in industry affects concentration in banking too, because firm efficiency influences leverage decisions, an ad-hoc model of the dynamic interaction of the two indexes shows that the optimal market structures in both industry and banking are between perfect competition and monopoly. The use of after tax data in assessing the Lerner indexes empirically, can distort conclusions because the index responds positively to a tax rate change, and asymmetric tax changes can distort the relationship between industry and financial market concentration. Monetary and competition policies can influence concentration in the desired direction if any, but decision-making has to assess first if domestic industry concentration is desirable on grounds of global competition.