THE QUARTERLY JOURNAL OF ECONOMICS Vol LXV August, 1951 No. 3 RELATION OF PROFIT RATE O INDUSTRY CONCENTRATION AMERICAN MANUFACTURING. 1936-1940 By JOE S.BAIN I. The concentration-profits hypothesis, 294.-II. Industry definition neasure of concentration, and selection of sample, 297.--III. Character and tions of profit data, 305 -IV. Calculation of accounting profit rates, 310 -V. Association of industry profit rates and concentration, 311.-VI. Asso- tion of firm profit rates and industry concentration, 317 -VII. associatie of profit rates with other determinants, 321 vil, Summary, 323 Students of industrial price behavior have recently shown much interest in the concept of workable competition and in the potential association between the workability of competition and the structure of the industry. I Their evident uncertainty about the nature of such a relationship suggests the need for detailed empirical studies which would formulate specific hypotheses on the relations of market structure to market performance and would then test such hypotheses with available evidence. In another place, I have advanced some hypotheses concerning such relationships, emphasizing those of seller concentration, buyer concentration, condition of entry of product differentiation to profits, selling costs, and relative effi- ciency of scale and capacity. This paper reports on the results of a statistical study of one of the relationships in this complex, as found in American manufacturing industries from 1936 through 1940 namely that of the size of profits or profit rates to the degree of seller concentration within industries 3 The Current Status of the Monopoly Problem in the United States, Harvard Law Review, June 1949, pp. 1265-85; M.A.Adelman Effective Competition and the Anti-Trust Laws, "ibid. September 1948, pp. ay 3. I am indebted to the Bureau of Business and Economic Research, Uni- versity of California, Berkeley, for extensive assistance in this study throughout the academic year 1949-50, and to Mr Allan Muir, who undertook substantiall all the work of statistical compilation and calculation and who contributed measurably to the development of statistical analyses. 293