VOL, 75 NO. 3 SCHMALENSEE: DO MARKETS DIFFER MUCH? by maintained hypotheses regarding the de- seemed unlikely to correspond even ap terminants of those effects. I can focus proximately to meaningful markets. This rectly on the general implications of extreme removed 340 observations. In order to miti classical, revisionist, and managerial posi- gate scale-related heteroscedascity problems tions without having to deal with issues of and to focus on the revisionist mechanism endogeneity or identification. In addition, if (as distinguished from scale economies), the one doubts a priori that any of these extreme 1,070 remaining observations with market positions is tenable, one can look to quanti- shares of less than 1.0 percent were excluded tative evidence on the importance of firm, (Note that none of these involve small firms market, and market share effects and the all are small divisions of the 471 large firms correlations among them to suggest tenable sampled by the FTC. )Finally, one outlier compromise positions as well as questions (with operating losses exceeding sales and and strategies for future research assets/sales several times larger than other One important issue of research strategy business units in its industry) was excl an be very easily addressed within this before analysis began. Our final data set framework: is it defensible to work with contained 1.775 observations on business industry-level data? Given the central role of units operated by 456 firms in 242 of the 261 profits in industrial economics, the answer FTC manufacturing industries must depend critically on how important In equation (1),ri was measured as the industry effects are in determining industry ratio of operating income to total assets, rates of return. Only if industry profitability expressed as a percentage. This quantity pro- mainly reflects industry-level effects can one vided an estimate of the total pre-tax rate of ope that hypotheses about the(classical, return(profits plus interest) on total capital counting, disequilibrium, and other) de- employed; it seemed superior on theoretical terminants of those effects can be produc- grounds to the frequently employed price- tively tested with industry-level data. If R, is cost margin as a measure of profitability the(appropriately weighted) average rate of Its mean was 13.66, and its variance, s(r), return of business units operating in industry was 348.97. For each industry in the sample, j, equation (1)implies also computed the asset-weighted average ate of return, r. The mean and variance (3)R,=u+B, +terms in a's, Ss, and e's. these 242 numbers were 13.08 and 86.91 Industry-level analysis would seem to be mates computed and kindly supplied by sensible if and only if (estimates of)o2(B) Ravenscraft. The mean percentage market are large relative to the cross-section vari- share in this sample was 6.14, with a variance ance of the R, so that industry-level dif- of 59. 23(=S-(S)) ferences are important determinants of in Ill. Empirical Findings All empirical results reported below are based on a subset of the 1975 data on indi- Figure 1 summarizes the results of least vidual business units gathered and compiled squares estimation of equation (1) and re by the FTCs line of Business Program These business units account for about one- half of manufacturing sales and about 9 The industrie opped were the two-thirds of manufacturing assets.(See 22. 12. 23.06, 23.07 24.05, 25.06, 28 Ravenscraft and the sources he cites for de. 32. 18.33.13,34.21,35.37.36.28.37.14 tailed discussions of the FTC data. In order rates of return on investment not on sales. The case for to minimize the influence of newly born and ng rate of return on sales as a measure of the lerner nearly dead operations, only the 3, 816 busi- index rests a be lief that accounting aver ness units present in the ftc data in both good proxy for marginal cost, which I doubt, and the 1975 and 1976 were considered. Sixteen in- undeniable proposition that sales are measured more dustries that appeared to be primarily resid accurately than assets I This variable is 100 times the variable MS used by ual classifications were excluded because they Ravenscraft