Knowledge that Transforms

A study of how customers will respond to a tax based on miles per gallon indicates that the long-term effect on gasoline consumption could reduce crude oil imports by 27 percent. When demand elasticity of gasoline is broken down into the price elasticity of demand minus the price elasticity of demand for fuel mileage, it is learned that the short-term miles per gallon factor is larger than previously thought. Adjustments in the stock of automobiles to those providing better gas mileage is indicated by a 20 percent increase in miles per gallon with an additional 40 percent gasoline tax. 20 references.

Magee, Stephen P., Currency Contracts, Pass-through and Devaluation, Brookings Papers on Economic Activity (1, 1973), 303-323. , Prices, Incomes and Foreign Trade, in Peter B. Kenen (ed.), International Trade and Finance: Frontiers for Research (New York: Cambridge University Press, 1975). Malinvaud, Edmond, Statistical Methods of Econometrics (Amsterdam: North-Holland Publishing Company, 1970). Nerlove, Marc, Spectral Analysis of Seasonal Adjustment Procedures, Econometrica 32 (July 1964), 241-285. Orcutt, Guy H., Measurement of Price Elasticities in International Trade, this REVIEW 32 (May 1950), 117-132. Pearce, Ivor F., International Trade (London: Macmillan, 1970). Robinson, Joan, Foreign Exchanges, American Economic Association, Readings in the Theory of International Trade (Homewood, Illinois: Richard D. Irwin, Inc., 1949). Stern, Robert M. , The Balance of Payments (Chicago: Aldine Publishing Co., 1973). Stern, Robert M., Jonathan Francis, and Bruce Schumacher, Price Elasticities in International Trade (Toronto: Macmillan of Canada, 1976). United States Department of Commerce, The National Income and Product Accounts of the United States, 1929-1965, Statistical Tables, a supplement to the Survey of Current Business (Washington, D. C.: U. S. Government Printing Office, 1966). Survey of Current Business (July editions) (Washington, D. C.: U. S. Government Printing Office, 19681974). Whitman, Marina v. N., Global Monetarism and the Monetary Approach to the Balance of Payments, Brookings Papers on Economic Activity (3, 1975).

A. Mitchell Polinsky, David T. Ellwood, An Empirical Reconciliation of Micro and Grouped Estimates of the Demand for Housing, The Review of Economics and Statistics, Vol. 61, No. 2 (May, 1979), pp. 199-205

M OST theoretical and empirical work on the determinants of individual earnings has placed special emphasis on an individual's educational attainment and on his or her years of work experience. Although interpreting the effects of education on earnings is relatively straightforward,1 the proper interpretation of the effects of experience on earnings is much less clear. It is certainly true that earnings tend to rise with years of experience, but the nature of the underlying mechanism that generates that increase is still largely an unresolved issue. An understanding of the way in which experience increases earnings is especially critical for the analysis of wage differentials by race and sex. Previous empirical research has shown that black men and both black and white women have flatter experience-earnings profiles than white males and that differences in the returns to experience account for a large portion of observed wage differences.2 The most widely accepted interpretation of the relationship between experience and earnings is that of the human capital model, which considers years of work experience as a proxy for unobservable investment in on-the-job training.3 According to the human capital model, wage differentials among individuals over the life-cycle are largely the result of differential patterns of investment in human capital, primarily in the form of investments in on-the-job training. Most human capital training models have been developed for the case of training that increases worker productivity in more than one firm (general training) as opposed to specific training that increases productivity in only one firm. It is frequently argued that because women expect to have a less regular pattern of labor force participation, they have a shorter work horizon than otherwise similar men and, thus, they have clear economic incentives to invest in less on-the-job training.4 As a result, women will, in general, have accumulated less human capital than men with the same number of years of experience and, consequently, their returns to experience would be expected to be lower. For black males, lower human capital investment is attributed to discrimination and/or their presumed poorer quality of schooling. Discrimination reduces the value of any potential investment, while poor schooling is thought to increase the costs of acquiring training.5 An alternative view of the earnings-experience relationship draws on models of labor market segmentation.6 These models differ from the human capital model primarily in their focus on the characteristics of jobs and job markets, rather than the characteristics of individuals. Earnings are thought to be largely determined by the labor market in which an individual works rather than the skills (or human capital) he or she possesses. Training itself is viewed as being largely technologically determined by the design of jobs, so that a specified amount of training is intrinsic in any given job. An individual acquires training by first gaining access to a job that provides training; that is, jobs and job markets intercede between an individual and investment in on-the-job training. Segmented market theorists usually argue that because hiring decisions involve a considerable amount of subjective input there is ample opportunity to practice discrimination. They cite entry level discrimination as a major institutional barrier between the primary and secondary sector, Received for publication January 17, 1978. Revision accepted for publication November 1, 1978. * Institute for Social Research and University of Michigan, and University of Delaware, respectively. 1 A recent review of this literature is given in Blaug (1976). 2 For example, see Mincer and Polachek (1974), Blinder (1973). 3The basic references are Becker (1964), Ben-Porath (1967), and Rosen (1972). 4 Mincer and Polachek (1974); Johnson and Stafford (1974). 5 The effect of discrimination on investment varies in different versions of the human capital model. It has no effect in a Ben-Porath type model, but reduces optimal investment in Rosen's model. 6 This model was popularized by Doeringer and Piore (1971).

T HIS paper analyzes the changing pattern of comparative advantage in manufactured goods in the process of accumulation of physical and human capital that characterizes economic development. Section I of the paper describes the model to be estimated while section II defines the explanatory variables employed. The empirical results are presented in section III, and the policy implications of the results are analyzed in section IV.

THE theory of industrial organization has by and large viewed the industry as a homogeneous unit. Firms in an industry are assumed to be alike in all economically important dimensions except for their size. In this context, a considerable body of research posits that many industries are characterized by the existence of market power among their firms.1 This market power results, following Bain and others, from the presence of structural barriers to the entry of new competition and from industry characteristics (such as seller concentration) which lead to the recognition of mutual dependence among competitors and thereby stop interfirm rivalry short of the competitive ideal. Barriers to entry equally protect all firms in the industry from new entrants and the fruits of mutual dependence recognition accrue symmetrically to all firms, as well. Thus market power is an by all firms in an industry in proportion to their sales. Above-normal profits are the manifestation of this market power, and the profit rates of firms in an industry should be equal except for random (and hence uninteresting) disburbances. This theory of industrywide or shared asset profit determination, versatile as it has proven to be, is at odds with both commonplace observation and a small but growing body of systematic empirical studies. All firms in the typical industry are clearly not alike: they follow very different strategies along dimensions such as their degree of vertical integration, breadth of product line, distribution arrangements, and so on. An industry's member firms also frequently earn rates of return on invested capital that exhibit considerable variance. For example, General Motors has persistently outperformed Ford, Chrysler, and American Motors.2 IBM outperforms other computer manufacturers. Crown Cork and Seal (a smaller firm) persistently outperforms National Can, American Can and Continental Can. Finally, there are several statistical investigations of profitability that have produced results inconsistent witth the theory of market power. Demsetz (1973) has, for example, found that the profits of smaller firms are not higher in concentrated industries than they are in unconcentrated ones, though the profits of larger firms are.3 Shepherd (1972) argued that market power is firm-specific and dependent on the -firm's own market share, implying that profit rates increase systematically with size within an industry. Yet Marcus (1969) found that the relationship between firm size and profitability within an industry is erratic, with some industries exhibiting positive relations, some negative relations and others no apparent statistically significant relation at all. The purpose of this paper is to present a theory of the determinants of companies' profits which rests on the structure within industries as well as on industrywide traits of market structure. Built on the concepts of strategic groups and mobility barriers, this theory provides an explanation both for stable differences in competitive strategies among firms within an industry, and for persistent intraindustry profit differences among firms. I will show that the theory is consistent with the previously reported statistical results noted above. Next, I will present the supportive results of a new statistical test which examines the structural determinants of profitability for firms differently situated within their industries. Finally, I will show that the empirically supported theory refutes the Demsetz/Mancke view that large firms earn higher profits largely because they are more efficient or lucky, and not because they possess market power. Received for publication September 13, 1977. Revision accepted for publication March 20, 1978. * Harvard University. This study was supported by the Division of Research at the Harvard Graduate School of Business Administration and by the General Electric Foundation. It also benefited from comments by R. E. Caves and Michael Spence. 1 This is the familiar structure-conduct-performance paradigm of industrial organization. See Bain (1956). Scherer (1970) provides a comprehensive review. 2 For these and the other firm profitability data, see the helpful compilations in Forbes, January 1, 1977 and earlier years. 3 A consistent result is obtained by Osborn (1970), who finds that concentration has little (or a negative) effect on the profitability of small, fringe firms in an industry.