Competition and Dispersion in Rates of Return: A Note

IN his landmark Capital and Rates of Return in Manufacturing Industries, Stigler observed 'There is no more important proposition in economic theory than that, under competition, the rate of return on investment tends toward equality in all industries'.' He then developed and tested two hypotheses relating to this proposition: the average rate of return should be higher in monopolistic than in competitive industries, and the dispersion of average rates of return among monopolistic industries should be greater than among competitive industries. His empirical evidence was generally unfavorable to the former hypothesis for U.S. industry while the latter hypothesis was sustained for the years I938-47 but not for I947-54. Subsequently, the possibility that anti-competitive conditions raise rates of return on capital has been verified empirically in a number of investigations utilizing post-World War II data for the American economy.2 However, the relationship between competition and dispersion of rates of return does not appear to have been re-examined directly even though it would seem to be central to the general proposition Stigler enunciates. The purpose of this note is to make such a re-examination, utilizing more recent data for the U.S. economy, not only of the Stiglerian hypothesis that dispersion of returns will be greater among monopolistic than competitive industries, but also of the parallel hypothesis that dispersion will be greater within monopolistic industries. The rationale underlying these hypotheses is straightforward in the extreme. Because of different demand and cost conditions, some monopolistic industries will earn high rates of return while others will earn only the competitive rate. These differences can persist if the more profitable