Price-Cost Margins and Industry Structure:

Abstract

A NUMBER of studies have yielded evidence of significant association between certain characteristics of industry structuresuch as high concentration and substantial entry barriers and variations in industry performance, particularly with respect to profitability.* In general, these studies tend to confirm the expectation that, other things being equal, profits will tend to be higher in industries in which structural conditions depart substantially from those of the competitive model. However, as Stigler [16, p. 145] has noted, the statistical associations found are usually weak, and a substantial amount of performance diversity is left unexplained. Thus, the typical strength and character of the structure-performance associations, and the importance of individual structural factors in the overall pattern, have remained open to question. Many hypotheses have been suggested; only a few are subject to serious empirical investigation; fewer still have actually been examined. This paper presents a summary report on our efforts to test a small number of fairly straightforward structure-performance hypotheses against the most comprehensive collection of relevant data available, the concentration statistics for 1958 and 1963 [18, 19]. These tests have focused on a single performance measure, the percentage price-cost margin, which we take as an indicator of the ability of firms in an industry to obtain prices in excess of direct costs. We have found a significant association between the price-cost margin and the level of four-firm concentration among fourdigit SIC (Standard International Trade Classification) industries; and this association is not eliminated when differences in capital-intensity among industries are taken into account. We have further found: (1) a tendency for the strength of the concentration-margins association to increase over the period 19581963, particularly in industries in which the level of four-firm concentration was stable or increasing; (2) a substantially stronger association between concentration and margins in consumer goods industries, as compared to producer goods industries; and (3) evidence that the principal component of the concentration-margins association in consumer goods industries is a correlation between concentration and margins of the four largest firms alone, in those industries in which these firms have higher margins than their smaller rivals. The first section of this paper establishes the background and framework of our analysis, and the following sections present the evidence of these findings in some detail.