Concentration and Profit Rates: New Evidence on an Old Issue

In this paper, the relation of concentration to profit rates is examined with the help of new data for a sample of 507 manufacturing firms. Specifically, these data make it possible to distinguish between specialized and diversified firms. For the latter, measures of concentration relate to the entire range of a firm's activities rather than merely to its primary activity. ¶ Using several measures of the profit rate, the results obtained consistently show that there is no clear single-variate relation between concentration and the level of profits. Indeed, the industry in which the firm operates exerts only a weak influence on the differences in profit rates among firms. However, the profit rates of firms in the more concentrated industries show a substantially higher serial correlation. The latter result is attributed to high exit as well as entry barriers in the concentrated industries. Economic theory offers a clear-cut solution for the relation of profits to monopoly power only for the polar cases of single-firm monopoly and NOTE: We would like to thank Henry G. Grabowski, Merton I. Peck, and George I. Sligler of the staff reading committee and Eniilio G. Coltado, Almarin Phillips, and Theodore 0. Yntema of the Directors reading corr.mittee for their careful reading of the manuscript and their helpful comments. The study was partiatly funded by the [ducationdl Foundation of the American Association of Advertising Agencies.