Market Structure, Sales to Government, and the Theory of Oligopoly

Abstract

This paper examines the relationship between industry profitability, sales to government, market structure, and firm size. The empirical results consistently show that government purchases of goods and services from the private sector significantly raise the profits of small firms across all industries, but that there is no significant relationship between large firm profitability and sales to government, even in highly concentrated industries. It is concluded that sales to government do not appear to facilitate collusion among large firms. Instead, the main impact of government purchases is to transfer wealth from the general taxpayer to small business. The problem implicitly raised by these remarks is why all sales to the government are not at collusive prices. Part of the answer is that the government is usually not a sufficiently large buyer of a commodity to remunerate the costs of collusion [Stigler (1968, p. 45)].