VOL. 75 NO. 3 SCHMALENSEE: DO MARKETS DIFFER MUCH? schools and management consultants exist Conventional, classical industry-level vari- because it is widely believed that some firms ables may thus perform poorly at least in are better managed than others and that part because they are poor, incomplete mea one can learn important management skills sures of the(classical and other) market that are not industry specific. In a widely effects present in available data. Since many cclaimed best seller, Thomas Peters and of the usual classical industry-level variables Robert Waterman, Jr.(1982) stress the are endogeneous in the long run, and it mportance of firm-level efficiency differences difficult to formulate enough noncontrol- asure on differences in versial exclusion restrictions to identify organizational cultures. Dennis Mueller 1977, 1983)has recently reported economet- that problems of measurement and disequ ric results implying the existence of substan- librium can be successfully attacked by tial, long-lived differences measured firm structural modeling using available cre profitability. When profit rates in 1950 are section data taken into account, Mueller (1983)finds that concentration has a significant negative co- II. Methods and Data efficient in an equation explaining projected firm profit rates in 1972, and industry effects Instead of attempting structural analysis, in general are relatively unimportant. this study employs a simple analysis of vari- Both the revisionist and managerial alter- ance framework that allows us to focus di natives to the classical tradition are based on rectly on the existence and importance of plausible arguments and suggestive evidence. firm, market, and market share effects with But I do not think that it has been shown out having to deal simultaneously with that the classical attention to the industry specific hypotheses and measurement issues was in any sense a mistake: case studies related to their determinants. Specifically, I f real markets clearly reveal important deal in all that follows with the following differences. Why, then, do conventional mar- basic descriptive model ket-level variables perform poorly or per- versely when firm or share effects are in- (1) r,=u+a; +B+YS, +ei cluded in cross-section regressions One probable reason comes readily to where ri is the(accounting)rate of return of have very imperfect measures of the classic market share, the a's are firm effec,, is its dimensions of market structure and basic are industry effects, u and y are constants, onditions. Conditions of entry have proven and the e's are disturbances. The assump particularly difficult to measure in a satisfac- tions that market share enters linearly in( tory fashion. moreover, the link between the and that y is the same for all industries are eal, economic profitability dealt with in made mainly for comparability to the litera heoretical discussions and the accounting ture, though both also simplify computation returns used in empirical work is weakened and interpretation. The 1975 FTC Line of by inflation (Ge eoffrey Whittington, 1983), Business data set, which I use, contains in- depreciation policy(Thomas Stauffer, 1971; formation on large multidivisional firms Franklin Fisher and John McGowan, 1983), Such information is clearly required to sep- risk (myself, 1981), and both cyclical arate firm and industry effects in (1) (Leonard Weiss) and secular (Ralph Brad While none of the coefficients in (1)can be burd and Richard Caves, 1982)disequilibria. given a defensible structural interpretation analysis of that model as a whole can shed An additional individual lines of this, spurious industry effects added to bus trary. If firms fol