THEAMERICAN ECONOMIC REVIEW JUNE 1985 study. Differences among firms were as- thus predicts a positive correlation between sumed transitory or unimportant unless concentration and profitability in cross based on scale economies, which were gener- tion at the industry level even though, by ally found to be insubstantial. Equilibrium assumption, concentration does not facilitate ndustry profitability was generally assumed the exercise of market power to be primarily determined by the ability of At the firm or(for multiproduct firms) established firms to restrict rivalry among business unit level, the revisionist view themselves and the protection afforded them plies that market share should appear as the by barriers to entry. A central hypothesis in primary determinant of profitability in cross virtually all the classical work was that in- section regressions, while market concentra creases in seller concentration tend to raise tion should have no impact. David Ravens- industrywide profits by facilitating collusion. craft (1983)checked these predictions with Most classical studies thus included con- FTC Line of Business data. 5 He found the centration among the independent variables impact of share on business unit profitability in regression analysis of industry average to be positive and highly significant, while rates of return, and most published studies the coefficient of concentration in the same reported the coefficient of concentration to regression was negative and significant. be positive and significant Ravenscraft interpreted his results as provid An anticlassical. revisionist view of in Ing strong support for the revisionist argu- dustrial economics has emerged in the last ment that the significance of concentration decade. In the simplest model consistent with in traditional industry-level cross-section re- this view, all markets are(at least approxi gressions arises because concentration mately) competitive, and scale economies are related with share(and thus efficiency) absent(or negligible). The key assumption is differences, not because it facilitates collr that within at least some industries there are sion. Stephen Martin has recently obtained persistent efficiency differences among sell- similar results in a simultaneous equations ers. Because more efficient enterprises tend analysis of the FTC data. The strong relation both to grow at the expense of their rivals between market share and profitability found and to be more profitable, these differences by these and other authors is difficult tend to induce a positive intra-industry cor- interpret within the classical tradition, given relation between share and profitability even the apparent absence of important scale in the absence of scale economies. moreover. economies in most industries the more important are efficiency differences A third tradition, which I will call man- in any industry, the less equal are market aerial, has yet another set of implications shares (and thus the higher is market con- for business unit profitability. Business centration) and the higher are the profits of the leading firms (and thus the higher is ndustry average profitability). This model also Sam Peltzman (1977). Interesting formal models nsistent with this view have recently been 2Leonard Weiss( 1974)provides a survey of cross- by Boyan Jovanovic (1982), S. A. Lippman and R.P. section studies in the classical tradition; see also F, M. Rumelt(1982), and others. It is important to note that rer(1980,ch.9) something like the classical notion of entry or mobility Efficiency should not be interpreted barriers( richard C and Michael Porter, 1977)must cess terms here be invoked to explain why imitation does not the production of astrian climinate efficiency differences among firms characteristics it supplies to an existing lier studies of the eff reating something approaching a new market)canr of market share. Most obtained results n. It seem stent with those of Ravenscraft and ste propriate to think of nondramatic product innovations in efficiency terms for purposes of positive analysis of See Scherer(ch. 4) for an excellent survey of the rofitabili available evidence on economies of scale