Market Structure and the Cyclical Flexibility of Price-Cost Margins

In a trade which uses very expensive plant, the prime cost of goods is but a small part of their total cost; and an order at much less than their normal price may leave a large surplus above their prime cost. But if producers accept such orders in their anxiety to prevent their plant from being idle, they glut the and tend to prevent prices from reviving. In fact however they seldom pursue this policy constantly and without moderation. . . . Extreme variations of this kind are in the long run beneficial neither to producers nor to consumers; and general opinion is not altogether hostile to that code of trade morality which condemns the action of anyone who spoils the market by being too ready to accept a price that does little more than cover the prime cost of his goods, and allows but little on account of his general expenses. ... Thus, although nothing but prime cost enters necessarily and directly into the supply price for short periods, it is yet true that supplementary costs also exert some influence indirectly. A producer does not often isolate the cost of each separate small parcel of his output; he is apt to treat a considerable part of it, even in some cases the whole of it, more or less as a unit.... And the analytical economist must follow This paper hypothesizes that the relationship between industrial concentration and the cyclical flexibility of prices (or price-cost margins) may be positive, rather than negative as conventionally held. Previous studies of the question have had difficulty in controlling for transactions versus list price problems, trend effects versus cycle effects, and changes in direct input costs. This study deals with these problems by investigating the trendadjusted cyclical variability of price-cost margins (calculated from Census of Manufactures and Annual Survey of Manufactures data) for a sample of 79 four-digit manufacturing industries over 1958-70. A significant positive relationship Jbetween industrial concentration and the cyclical flexibility of margins is found. * The views contained herein are those of the author only. They do not necessarily represent those of the Federal Trade Commission or other members of its staff.