Profit Rates and Market Shares of Leading Industrial Firms in Japan

THE relationship of the top firm's profit rate to its market share, its stock of goodwill and other elements of the market structure was investigated using data on Japanese industrial firms. Traditional microeconomic theory suggests that firms in oligopolistic industries restrict output, raise prices and earn higher profits than do firms in competitive industries, and therefore there will be an important misallocation of resources. To test the validity of this hypothesis there have been a rather large number of studies, beginning with a study by Bain [i], which investigated the relationship between profitability and market structure. Most of these quantitative tests of the structure-performance relationship have been based on data from the United States. Thus, it is of particular interest to see whether similar conclusions concerning the structure-performance relationship can be reached in a fast-growing economy such as that of Japan. This is one justification for adding to the already voluminous literature on this subject. The second justification for our work is that we have collected data only for top firms-firms whose sales are the largest in their respective industriesand have investigated the relationship of each top firm's profit rate to its market share, its stock of goodwill and other elements of the market structure, which has not been examined previously and which is of some interest. It should be emphasized that the behaviours of non-top firms are likely to differ from that of a top firm, i.e. top firms often behave as leaders, while the remaining firms tend to behave as followers.1 Therefore, in order to improve the fitness of the structure-performance model, we restrict the sample to top firms. The third justification for our work is the use of the concept of the stock of goodwill, instead of the advertising/sales ratio. Previous empirical studies have consistently found a strong positive relationship between profit rates and advertising/sales ratios. The advertising/sales ratio has been generally believed to work as a proxy for the height of the product differentiation barrier to entry. Because there is no strong theoretical justification for using the advertising/sales ratio as an independent variable, empirical results based