An investigation of the determinants of profitability in New Zealand manufacturing industries in 1986–87

The empirical investigation of the Structure–Condust–Performance relationship has had to grapple with the problem that higher than usual profitability might arise from superior production efficiency, or alternatively from markets subject to lower competitive pressures. As such, the nature of investigation has evolved over time to include the market power-efficiency debate and the new industrial organisation emphasis on the joint determination of profitability and market structure. The purpose of this paper is to present some New Zealand evidence, with a unique feature being to include a measure of firm level efficiency in a disaggregated model estimated using firm level data. The results suggest both market power and efficiency play a role in determining profitability, although efficiency dominates.