Market Structure and Industrial Performance: Relation of Profit Rates to Concentration, Advertising Intensity, and Diversity

MARKET structure has long been considered as a prime determinant of industrial performance. Firms in the search for profit restrict output, raise price, and earn supernormal profit if the market structure in which they find themselves permits. This article reports an empirical attempt to relate industrial performance with market structure in the U.S. manufacturing sector: measures of profit rates are regressed on measures of market structure. The primary performance variable is a profit rate, computed in two ways: income after taxes plus interest paid on borrowed capital as a percentage of total assets, and income after taxes as a percentage of net worth. The independent variables reflecting market structure are (i) the four-firm concentration ratio; (2) the marginal eight-firm concentration ratio (the share of industry output produced by firms ranked 5 through 8, thus the difference between the eight-firm and the four-firm CR); (3) advertising intensity (advertising expenditures as a percentage of sales); and (4) the degree to which firms classified in the industry specialize in the product of that industry or are diversified into other industries. The industry observations are Internal Revenue Service minor industries, roughly the three-digit Standard Industrial Classification level of aggregation. The multiple regression equations are based on all iO6 minor industries in manufacturing and on two divisions of these industries, one based on producer goods-consumer goods classification and the other based upon national-non-national and homogeneous-non-homogeneous market classification.