Market Concentration and Pricing Power: Descriptive Evidence from Chinese Industries, 2017–2021

Abstract

This study explores the relationship between market concentration and firm-level pricing power in China using panel data from 2017 to 2021. Drawing on industry-level Herfindahl-Hirschman Index (HHI) measures and firm-specific Lerner Index values, the analysis adopts a descriptive approach to investigate how different levels of industry concentration correlate with firms’ ability to mark up prices over marginal costs. Contrary to the traditional view that higher concentration uniformly enhances pricing power, the results reveal a non-linear relationship: industries with moderate concentration exhibit the highest average Lerner Index, while both highly fragmented and highly concentrated industries display lower, and in some cases negative, mean pricing margins. These findings suggest that moderate concentration creates an optimal environment for firms to exercise pricing power without inviting destructive competition or excessive regulatory scrutiny. The study extends classical industrial organization theories and complements recent empirical research by providing industry-level evidence from a non-U.S. context. While the descriptive nature of the analysis limits causal inference, the results offer important implications for competition policy, highlighting the need for regulatory frameworks that support moderately concentrated market structures to promote both firm profitability and consumer welfare.