A Critique of Empirical Studies of Relations Between Market Structure and Profitability

A LARGE number of empirical studies of relations between market structure and profitability have appeared since Bain's seminal work i. While there has not been an absence of disputation about the results, it seems fair to say that at present the 'conventional wisdom' gained from the studies is that a positive relationship exists between industrial concentration and profits, particularly when concentration exceeds some critical limit and when there are substantial barriers to industry.' It is not the purpose of this paper to add yet another review of this literature. Neither is it the purpose to argue whether the positors of the 'conventional wisdom' or their critics are correct. Rather, the purpose is to examine some basic empirical questions in more detail than have the authors, their reviewers or their critics. The section which follows concerns the theoretical foundations of the studies. That is, questions are raised about model specification. The next section deals with data problems and leads rather directly to the last substantive section, which treats problems of identification. The conclusion is that there is little basis from theory or from the empirical work to hold fastly to one view or another.