Concentration and Price-Cost Margins in Manufacturing Industries

By Norman R. Collins and Lee E. Preston

Authors Collins and Preston, who have collaborated on earlier studies of industrial organization and marketing, are here concerned with the relationship between business concentration and profitability in American manufacturing industries. Economic theory states that prices are higher and price-cost margins wider under conditions of monopoly than under those of competition. the problem in applying this theoretical conclusion to empirical analysis and economic policy is that a gap exists between the theoretical concept of monopoly on the one hand and the measurement of concentration on the other. A number of earlier studies have analyzed samples of available data to relate measured concentration to profitability. the present study reviews these previous efforts and provides a common basis for comparison of them. It then analyzes statistical data for the year 1958 in order to obtain an extensive new collection of empirical results. This analysis focuses specifically on the inter-industry variability of price-cost margins, and seeks to explain this variability in terms of differences in concentration and other variables. This title is part of UC Press's Voices Revived program, which commemorates University of California Press's mission to seek out and cultivate the brightest minds and give them voice, reach, and impact. Drawing on a backlist dating to 1893, Voices Revived makes high-quality, peer-reviewed scholarship accessible once again using print-on-demand technology. This title was originally published in 1968.

• Language: English
• Publisher: University of California Press
• Release date: Nov 10, 2023
• ISBN: 9780520311619

Norman R. Collins

At the time of original publication, Norman R. Collins was Professor of Agricultural Economics and Business Administration and Lee E. Preston was Professor of Business Administration both at the University of California, Berkeley.

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THE INSTITUTE OF BUSINESS AND ECONOMIC RESEARCH

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CONCENTRATION AND PRICE-COST MARGINS IN MANUFACTURING INDUSTRIES

CONCENTRATION AND PRICE-COST MARGINS IN MANUFACTURING INDUSTRIES

Norman R. Collins and Lee E. Preston

PUBLICATIONS OF

THE INSTITUTE OF BUSINESS AND ECONOMIC RESEARCH UNIVERSITY OF CALIFORNIA

UNIVERSITY OF CALIFORNIA PRESS Berkeley, Los Angeles and London 1970

University of California Press

Berkeley and Los Angeles, California

University of California Press, Ltd.

London, England

Copyright © 1968, by The Regents of the University of California

Second Printing, 1970

ISBN 0-520-00254-7

Library of Congress Catalog Card Number: 68-63025

Printed in the United States of America

For Dolores and Patricia

INSTITUTE OF BUSINESS AND ECONOMIC RESEARCH

UNIVERSITY OF CALIFORNIA, BERKELEY

Roy Radner, Chairman

Richard M. Bailey

Richard H. Holton

Daniel L. McFadden

William J. Vatter

Joseph W. Garbarino, Director

rhe opinions expressed in this study are those of the authors. The functions of the Institute of Business and Economic Research are confined to facilitating Jie prosecution of independent scholarly research by members of the faculty.

Preface

This study examines the relationship between conventional measures of industrial concentration and the percentage margin between prices and costs. Much has been written about the relationships that may be expected between industry structure and economic performance, and a great variety of indicators and measures may be used to examine these relationships empirically. Concentration data, which report the share of a specified small number of firms in the total activity of an industry, have become the most widely available structural indicators, but controversy has continued as to their interpretive or predictive significance. Therefore, our intention here is to examine the usefulness of concentration indexes as predictors of interindustry differences in price-cost margins.

Simply stated, the proposition under analysis here is that the level of concentration affects the interdependence of action among firms and, therefore, the closeness of their market performance to the theoretical monopoly solution. The hypothesis for statistical investigation is that the relative excess of prices over costs is higher in more highly concentrated industries than in less concentrated ones. In testing this hypothesis, it is necessary, of course, to consider some of the other variables that might be associated with interindustry differences in price-cost margins. However, we have attempted to keep the hypothesis simple and the number of explanatory variables few in order to utilize the largest possible collection of data and to obtain results that are easily interpreted. In general, our results, taken in conjunction with those of previous studies based on more limited collections of data, support the conclusion that the level of measured concentration is associated with interindustry differences in profitability, although an important portion of these differences remains to be explained by other factors.

We are indebted to a large number of our colleagues for advice and criticism during the period we have been working on this study. Professor Leonard W. Weiss provided us with many helpful suggestions in his careful review of the manuscript. Professor James N. Boles gave us frequent counsel on the statistical and computer operations involved in the empirical work. We are indebted to the authors whose works are reported in Chapter II for their review of our presentation of their findings. Our thanks are also due to Mrs. Judith Drake for her diligent work in the assembly and processing of the industry data and to Mrs. Ellen McGibbon for her assistance in the typing of the various drafts of the manuscript. Financial support for this project was received from the Research Program in Marketing of the Graduate School of Business Administration and the Department of Agricultural Economics, University of California, Berkeley.

Contents

Contents

I Industry Structure and Performance Results

STRUCTURE-PERFORMANCE RELATIONSHIPS

CONCENTRATION AS A PREDICTIVE VARIABLE

THE PRESENT STUDY: MODEL AND HYPOTHESIS

THE REVENUE-COST RELATION

Il Results of Previous Studies

BAIN

LEVINSON

FUCHS

WEISS

SCHWARTZMAN

STIGLER

SHERMAN

III Profits and Concentration in Major Industry Groups

CONCENTRATION DATA

PROFIT MEASURES

RELATIONSHIP BETWEEN PROFITABILITY AND CONCENTRATION

IMPACT OF LARGE INDUSTRIES

AVERAGE CONCENTRATION AND PRICE-COST MARGINS

CONTINUITY OF RELATIONSHIPS

IV Concentration and Price-Cost Margins in Census Industries

DATA AND VARIABLES

ANALYTICAL PROCEDURE

STATISTICAL RESULTS

Food and Kindred Products

Stone, Clay and Glass Products

Primary Metal Industries

Fabricated Metal Products

Electrical Machinery

Miscellaneous Manufacturing

Four Additional Industries

SUMMARY OF RESULTS, TEN INDUSTRY GROUPS

ADDITIONAL RESULTS, FOUR-DIGIT INDUSTRIES

IMPACT OF DEMAND ELASTICITY

CONTINUOUS FUNCTION OR DISTINCT BREAK?

V Conclusion

DIVERSITY OF RESULTS

TIMING OF OBSERVATIONS

CONCLUDING REMARKS

Appendix A DATA EMPLOYED IN STATISTICAL ANALYSIS, FOUR-DIGIT INDUSTRIES, 1958

Appendix B STIGLER DATA ON CONCENTRATION AND RATES OF RETURN FOR INDUSTRIES CLASSIFIED BY GEOGRAPHIC SCOPE OF MARKET

INDEX

I

Industry Structure and Performance Results

Both economic theory and industrial experience suggest that the structural features of an industry strongly influence the competitive interaction among its constituent firms and the prices, profits, and output levels resulting in its markets. Only under rather narrowly specified theoretical conditions, however, has it been possible to deduce market performance entirely from structural factors. Indeed, beyond the limiting cases of complete monopoly and perfect competition, theory appears to serve best as a guide to the identification of potentially significant variables and to the development of hypotheses. These hypotheses have been investigated primarily on a case-by-case basis in industry studies and occasionally in collections of cross-sectional data developed for special analytical purposes.1

The accumulation of cross-sectional data in the form of concentration statistics—shares of the n largest firms in some aggregate of economic activity—has not, however, generally reflected an attempt to examine functional hypotheses. Such data have been computed for manufacturing industries in the United States periodically since 1935. Tabulations of data for 1954 and 1958 show the shares of the largest firms in the total value of shipments and total employment in their industries and in the total value of shipments of individual classes of products.2

A great part of the discussion of these data has been directed toward the descriptive content of the numbers themselves and the interindustry and time trends revealed in them. Such discussion tends to treat the numerical results as of intrinsic interest, or at least of known significance. Valuable as much of this work has been in developing and improving available economic information, much uncertainty remains as to the meaning to be attached to the facts discovered. This uncertainty is reflected in the quotations from authorities assembled by the U.S. Chamber of Commerce, 3 and is well summarized by the remark of Professor Kaysen that simple concentration measures "can point to the existence of markets in which the presence and effects of oligopoly deserve detailed study; no more sophisticated measure calculable without such detailed study of the particular market can do any more." 4

The investigation reported in this monograph was undertaken in an attempt to clarify the significance of concentration data as a guide to price and price-cost behavior in industrial markets. Much of the manufacturing output in the United States originates in industries in which a few large firms