Changes in the Size Structure of the Largest European Firms: An Entropy Measure

While concentration ratios within particular industries are accepted as conventional indicators of market power, the use of an 'overall concentration' approach has been viewed with suspicion.1 This approach defines overall concentration as being the proportion of some aggregate of economic activity accounted for by a relatively small number of the largest firms taken together. Nevertheless, the current trends in the nature of concentration make it imperative that we improve our understanding of overall concentration: its origins, its evolution, and its consequences. The actual degree of firm diversification and the multiplication of conglomerate mergers give birth to entities which cannot be reduced to the classical one-product firm. As a consequence, the concentration of economic power in the hands of these entities is not easily analysed in terms of the traditional approach. The increasing extent of firm diversification across product and industry lines create tlleoretical as well as empirical problems. On the one hand, microeconomic theory has little to offer in the way of testable hypotheses of how multi-industry firms behave.2 On the other hand, the researcher who uses Census of Manufacturing data on industries must be contented with the fact that 'parts of a single firm may be included in a number of industries and hence that the observations are not strictly independent'.3 Those considerations explain the renewed attention being paid to the analysis of the size structure of the giant diversified firms and their pattern of growth over time.4