Market Structure and Price-Cost Margins

In a paper that has become a standard reference in the structure-conductperformance approach to industrial economics, Cowling and Waterson (1976) developed a theoretical rationale for expecting industry profitability to be positively correlated with the level of concentration. Their model, based on a simple algebraic description of oligopoly behaviour, has been interpreted as providing a justification for the common empirical practice of cross-industry regression analysis of price-cost margins in terms of concentration levels. In the present paper we show that, on further examination, this model implies a joint determination of margins and concentration. This provides some interesting comparative static results of relevance to inter-industry differences in concentration levels. Equally, however, it leads to various (cautionary) insights concerning the meaning of price-cost margin versus concentration regressions.