Does Market Concentration Always Empower Firms? Evidence from City-Tier Differences in Urban China

Chinas rapid urbanization has led to stark regional disparities in market structure, institutional capacity, and regulatory enforcement across cities. While classical industrial organization theory posits a positive link between market concentration and firm-level pricing power, this relationship may be moderated by spatial and institutional heterogeneity. However, existing empirical studies often assume uniform institutional environments, overlooking the potential variation across city tiers in China. Therefore, this paper aims to examine how the relationship between industry concentration and firm-level pricing power varies across urban contexts. Using panel data of Chinese A-share listed firms from 2017 to 2021, the study constructs cityindustry-level HerfindahlHirschman Index (HHI) and firm-level Lerner indices to capture market structure and pricing behavior. Fixed-effects regressions are conducted separately for first-tier and non-first-tier cities to account for regulatory and economic heterogeneity. Results demonstrate that in first-tier cities, higher industry concentration is significantly associated with lower pricing power, possibly due to stronger competition and regulatory oversight. In contrast, no significant relationship is found in non-first-tier cities. These findings highlight the importance of urban complexity and localized governance in shaping firm conduct, challenging the traditional assumption that concentration uniformly enhances market power. The study provides policy insights for designing tier-sensitive competition strategies.