Profitability and market structure : concentration and scale economies in the Canadian manufacturing industry, 1965
Date
1977
Authors
Leeder, Arthur Ernest
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Abstract
Structure-performance analyses point to a positive relationship between profits and both concentration and scale economies. However, the precise nature of the relationship is obscurred by the commonly used proxy measures for scale economies. This study examined and clarified the relationship as it applies to a sample of 62 Canadian manufacturing industries. The sample consisted of 30 consumer-goods industries and 32 producer-goods industries and was determined largely by data availability. Multiple regression analysis based on ordinary least squares regression was employed throughout, standard statistical tests being applied where appropriate.
The analysis was in three main stages. First, to provide a basis for comparison, a conventional structure-performance model was applied to the given sample. Next, in an analysis involving dummy variables, the profits-concentration relationship was examined. Finally, various new proxy measures for scale economies were developed and tested.
A statistically significant difference in the profits-concentration relationship was found at a four-firm concentration ratio of approximately 33 percent, enabling the sample to be divided into 19 low concentration industries and 43 high-concentration industries which were then analyzed separately. A statistically significant and positive relationship was found to exist between profits and concentration for the high-concentration industries, but not for the low-concentration industries. Further results indicated that scale economies are a significant barrier to entry only when the cost disadvantage facing smaller plants is substantial. A general finding was that the low concentration industries do not lend themselves well to the conventional structure-profits analysis.