Knowledge that Transforms

T HE traditional hypotheses of industry organization relate various aspects of market structure to cross-sectional variation in profitability among industries or firms. It is presumed that association between profitability and structure indicates the existence of excess profits that would be absent under perfect competition. The fundamental causes of excess profits reaped by a whole industry are the existence of entry barriers, and the ability of firms within the industry to coordinate their output-price decisions. On the other hand, varying profitability among firms even within an industry may be due either to the superior bargaining position of the firm within a system of oligopolistic coordination or to superior efficiency in production and distribution. The relationship of structure and profitability, and the attendant interpretations, have been repeatedly examined at the level of ex post rates of return on capital. Such rates are by nature backward-looking since they register the average success of past investments. They do not, therefore, reveal the ability of a firm to retain and extend its excess returns into the future. In contrast to traditional studies this paper seeks to examine the future-oriented implications of market structure. A forward-looking index of profitability is a firm's market value. The basic issue which can be examined in the light of a value-based test of profitability and market structure is this: Does current structural position imply an ability on the part of the firm to maintain excess profits in the future? It must be noted that even if current structural position implies (or is implied by) superior efficiency, the ability of the firm to maintain such advantages into the future implies correspondingly a deficiency in the long-run competitive process since entry would presumably be expected to wipe out such efficiency differentials. It should also be clear that even if the basic question posed were answered in the negative, this would not imply that structural position is unrelated to ex post profits. Thus, the scope of the current work is complementary to traditional studies. The theoretical premises of the hypotheses are laid out in section B. Section C contains a description of specification for statistical tests. Section D presents empirical results and section E summarizes major conclusions.

Industrial energy demand is estimated for each Standard Industrial Classification (SIC) two-digit manufacturing industry using flexible cost functions to derive the systems of demand equations. Industries are found to vary significantly in the characteristics of their energy demand. The price and quantity consumed of electricity, fuel oil, natural gas, and coal are included in the model. Electricity demand is found to be the least responsive and fuel oil demand the most responsive to price. The results show a significant cross price as well as own price elasticity for all types of energy. Policy considerations should keep in mind that short-run responses of demand to price will be smaller than long-run effects. The effect of price changes on fuels used for power generation will also be reflected in the demand for oil, natural gas, and coal. 19 references. (DCK)

IN recent years empirical studies of local school finance have relied to a large extent on the median voter and related models, tested with data aggregated to the precinct, school district, or local level.1 While there are advantages to using aggregated data, the limited availability of data on the distribution of income, property tax payments, and other variables, as well as the possibility of bias associated with the grouping of households into aggregated units, suggest some important disadvantages.2 This paper attempts to analyze the demand for local public education using individual household data obtained through a survey of voters in two local school elections in a Detroit suburb.3 In section I a model of voting in a school election is presented. The model assumes that individual voters determine their desired level of educational expenditures per pupil by maximizing a utility function subject to a budget constraint. Individuals decide whether to vote for or against a given millage request by comparing their desired expenditure level with the actual and proposed levels. On the basis of some assumptions concerning the stochastic nature of the individual utility functions, our analysis suggests that the probability of a yes or no vote can be estimated using a binary logit form.4 In section II the model variables and estimates of the model parameters are presented and discussed. The estimation results are interpreted in the context of the voting model presented in section I and are compared to the results of several educational expenditure studies. In section III the outcome of the two local elections is analyzed, with an attempt made to explain the passage of the second election, in light of the failure of the first. In particular, the model is used to test the reaction of voters to the state circuit-breaker legislation which was enacted after the first election. Some concluding remarks are presented in the final section. Finally, some tests for the presence of bias in the survey responses are described in the appendix.

IN a recent article, Thomas Juster and Paul Wachtel (1972b) have examined the impact of the rate of inflation on consumer expenditures. Using survey data on individuals' expectations regarding the future rate of inflation, they concluded that inflationary expectations cause a reallocation of consumer expenditures. In particular, their analysis showed that a higher expected rate of inflation results in increased expenditures on nondurables and services and a decline in spending on durables. This article examines their findings and presents a different set of conclusions using objective measures of inflationary expectations based on past actual rates of inflation.

Berg, Sanford V., Increasing the Efficiency of the Journal Market, Journal of Economic Literature 9 (Sept. 1971), 798-813. Bronfenbrenner, Jean, Sources and Size of Least-Squares Bias in a Two-Equation Model, in William C. Hood and Tjalling C. Koopmans (eds.), Studies in Econometric Method (New Haven: Yale University Press, 1953), 221-235. Bush, Winston C., Paul W. Hamelman and Robert J. Staaf, Quality Index for Journals, this REVIEW 56 (Feb. 1974), 123-125. Eagly, Robert V., Economics Journals as a Communications Network, Journal of Economic Literature 13 (Sept. 1975), 878-888. Hawkins, Robert G., Lawrence S. Ritter, and Ingo Walter, What Economists Think of Their Journals, Journal of Political Economy 81, (July/Aug. 1973), 1017-1032. Johnston, John, Econometric Methods, second edition (New York: McGraw-Hill, 1972). Lovell, Michael C., The Production of Economic Literature: An Interpretation, Journal of Economic Literature 11 (Mar. 1973), 27-55. Moore, William J., The Relative Quality of Journals: A Suggested Rating System, Western Economic Journal 10 (June 1972), 156-169.

Two seminal budget studies by David Davies (1795) and Frederick Eden (1797) are employed below to investigate place of bread in diets of English rural laborers at end of eighteenth century.' Because of considerable geographic and temporal dispersion in prices of foodstuffs found in these budgets, they afford a unique opportunity to study influences of both prices and income on individual household consumption decisions. In particular a test is made of famous hypothesis, attributed by Marshall to Robert Giffen,2 that a rise in price of bread, ceteris paribus, increases its consumption among lower classes. Wheaten bread was, in Middle Ages, a luxury food of landed classes in Europe. Its gradual introduction into laboring class diets in modern period prompted David Landes (1969, p. 47) to conclude, ... one of best signs of comfort in Europe is consumption of white bread. The transition in England to wheat as the almost universal bread corn of whole people took place, according to Sir William Ashley (1928, pp. 1-2) primarily in eighteenth century and was virtually complete by 1795. The rise of wheat occurred most rapidly in southern and eastern counties and was favored by a more capitalistic agriculture since it often required special liming, other fertilization, and tilling. To contemporaries, and some modern historians, this change to wheaten bread seemed, for purely psychological reasons, to be irreversible. Radcliffe Salaman (1949, pp. 480-481) writes:

T HE economic rewards of college training, which have been substantial for decades, began to fall at the outset of the 1970s. The once sizeable premium to the college graduate diminished; attainment of professional and managerial job status became less frequent; and the rate of return to the college investment dropped after having risen in the 1960s (Freeman, 1975, 1976a). In this paper I use information on individuals from the Current Population Survey (CPS) March consumer income tapes for 1969 and 1974 to examine the dimensions and routes of the decline in the economic value of college training. The 1969 tape contains income from 1968, when the college market was still strong; the 1974 tape contains income for 1973 when the market was weakening. The CPS tape data are supplemented with other statistics, which permit some evaluation of developments through 1975. The paper focuses on white men and women, as the market for college-educated blacks has been dealt with in detail elsewhere (Freeman, 1977). Particular attention is given to young persons on the hypothesis that, for reasons to be elucidated later, the market for their services is likely to be especially active, and thus that declines in the relative position of graduates will be concentrated among them. The paper is divided into three sections. The first presents reasons for expecting a decline in the economic rewards to college in the 1970s and for expecting the decline to be most severe among the young. Section II contains an analysis of the CPS data regarding change in the early 1970s and supplementary evidence through 1975. Section III examines the possibility that the developments under study represent normal cyclic changes and then investigates the impact of the changes on potential future income streams and rates of return to the college investment. There are four principal findings: (1) The economic return to college measured by the income or occupational differences between college and high school graduates fell markedly for young men in the 1970s, a sharp break with past stability that is not readily explained by cyclic developments. (2) Among women there was a noticeable fall in the occupational position of graduates but an unclear pattern of change in relative incomes. (3) Because of the concentration of the drop in relative incomes among young men, the cross-section age-earnings profiles for college graduates twisted in favor of older workers in the 1970s. (4) As a result of the decline in relative incomes and continued increases in the direct cost of college, rates of return to the investment dropped noticeably in the early 1970s.

T HE measurement of firm size plays a crucial role in applied microeconomics and industrial organization. Firm size has figured prominently in numerous studies of economies of scale in production, advertising, capital market, and cash balances, and in studies of concentration, diversification, profitability, regulation, technological change, and research and development. Even when firm size was not their main concern, many studies often found that size emerged as a robust empirical variable.' All these studies have based their findings on different alternative measures of firm size, often implying that great care in choosing between them is unnecessary since the measures are highly intercorrelated. In a note in this REVIEW, Smyth et al. (hereafter SBP) were the first to recognize that alternative measures of firm size are not interchangeable unless stricter conditions than correlation are met. They have further shown that empirical findings regarding economies of scale are not invariant with the size measure chosen, and that often different conclusions can be reached depending on the particular size measure used. The purpose of this paper is threefold: (I) to offer a general stochastic model that rigorously spells out the conditions for interchangeability among alternative measures of firm size, and of which SBP's deterministic model is a special case; (2) to conduct a statistical test of the interchangeability conditionis using a larger number of size measures, and a far larger sample than the one employed in SBP's empirical test; and (3) to empirically analyze the statistical properties of the most commonly used measures in order to help future investigators in selecting appropriate size measures suitable for their purposes. Section I reviews SBP's work, section II discusses the measurement problem, section III presents our theoretical model, and section IV concludes with some empirical evidence.

Clark W. Bullard III, Anthony V. Sebald, Effects of Parametric Uncertainty and Technological Change on Input-Output Models, The Review of Economics and Statistics, Vol. 59, No. 1 (Feb., 1977), pp. 75-81

N theoretical discussions industrial organization specialists often indicate a preference for comprehensive or summary concentration indices over the more readily available concentration ratios. Such indices consider the entire size distribution of sellers in a market, and they give weight to both fewness of sellers and inequality of market shares. The most popular such measure is probably the H index of Hirschman (1945) and Herfindahl (1950). (See Hart (1975) for a discussion of alternatives and a list of references.) Let P1 be the share of the largest firm in an industry, measured in terms of sales, employment, or whatever scale variable is considered most relevant, let P2 be the share of the second largest firm, and so on, in a market with N sellers. Then H is defined by