MARKET STRUCTURE AND PROFITABILITY

Abstract

The purpose of this paper is to critically examine and test the relationship between market structure and profitability in the industrial sector of the U. S. economy. The majority of empirical studies testing this relationship have found a positive but weak correlation between concentration and profitability. The basic point of contention in the literature is the explanation of why this correlation exists. The traditional or “Harvard school” interpretation of a positive correlation between profit levels and concentration across industries is that market power is associated with concentration and results in relatively higher prices than competition allows in unconcentrated industries (a price effect). A more recent hypothesis, which is associated with the Chicago school of economics, is that profitability in concentrated industries is a result of their efficiency and corresponding lower costs of production (a cost effect).

Citation

CHAPPELL, B. (1980), "MARKET STRUCTURE AND PROFITABILITY", Studies in Economics and Finance, Vol. 4 No. 1, pp. 41-62. https://doi.org/10.1108/eb028615