Abstract
Very little attention has been devoted to incorporating dynamic elements into empirical models of market structure and performance. Consequently, there has been little progress in settling the issue of whether the market structure-profits relationship is more than just a temporary phenomenon. In this study, an estimation equation is developed which allows for incomplete adjustment of past profits from expected future profits, where expected profits depends on present and expected future changes in market structure. The model is estimated pooling panel data across industries. The findings indicate that adjustment to abnormal profits is relatively quick, market share adjustments are non-instantaneous, and that inclusion of industry-specific effects is important. The results suggest that previous studies are susceptible to specification bias from omitted variables.
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