THE REAL RATE OF RETURN TO CAPITAL MARKET STRUCTURE AND THE DETERMINANTS OF MARKET STRUCTURE IN UNITED STATES MANUFACTURING INDUSTRIES

The purpose of this study is to analyse, by means of cross sectional regression analyses, the relationship between market structure and rates of return to capital for the years 1972 and 1967. In an attempt to provide results which are representative of actual conditions in United States manufacturing industries, the present study includes several essential features. First, detailed adjustments to capital equipment and profit measures are undertaken in order to account for price changes over time. Without such adjustments, rates of return are overstated in periods of rising prices in industries with more durable assets relative to rates of return in industries with less durable assets. Second, concentration ratios are adjusted so as to take imports into account. Concentration indexes which do not account for imports tend to overestimate the extent of market power in industries where imports are high relative to domestic production and underestimate the extent of market power in industries where imports are low relative to domestic production. Third, the study employs average rates of return to leading firms in particular industries rather than average rates of return for the industry as a whole. This procedure takes into account the firms that actually tend to possess market power and examines the effects of collusion on profitability. This procedure also provides an implicit adjustment for excessive salaries of owner-managers of small corporations. Fourth, efforts are taken to ensure congruency between firm data and industry data. Fifth, in order to minimize the effects of diversification, only those firms are included where the primary product represents a substantial proportion of total sales. Sixth, marginal concentration indexes are employed in order to provide a multidimensional character to market structure. The marginal concentration ratios are also adjusted to account for imports. The present study not only emphasizes market structure but also analyses the relationship between rates of return and certain determinants of market structure. The determinants of market structure employed in this study are product differentiation, economies of scale, and industry technological progress. The results of the study, in general, exhibit statistically significant relationships between rates of return and market structure. The relationships are stronger for the adjusted concentration ratios than for the unadjusted concentration ratios. Results obtained from simultaneous estimation are consistent with results obtained from single equation estimation. The results, in general, also exhibit statistically significant relationships between rates of return and the determinants of market structure. The study provides evidence that the determinants of market structure interact to form barriers to entry.