N this paper I investigate proposition that price-cost margin of a producer goods industry will vary systematically with what I call industry's importance of its output in costs of its industrial customers. The empirical results indicate that price-cost margins are indeed negatively associated with cost-importance, particularly in highly concentrated industries. In these industries at least, evidence seems to confirm the importance of being unimportant. In section I, I present relationship between derived demand elasticity for an industry's output and cost-importance of its output, and also analyze ways in which industry pricing coordination and transaction costs of changing input suppliers interact with cost-importance to influence industry price-cost margins. In sections II and III I describe process of sample selection and a method for calculating a measure of cost-importance for producer goods industries. In section IV I present empirical results of estimating relation between price-cost margins and cost-importance for a broad sample of producer goods industries, and in section V I summarize my findings and suggest some promising avenues for future research.

One of the interesting theoretical questions relating to conglomerate firms is whether conglomeration alone, unaccompanied by market power, can have any impact on firm behavior and market performance. Many of those who argue that conglomeration without market power is behaviorally neutral obtain their results by assuming, implicitly or explicitly, that the firm maximizes profits (see Jesse Markham; Richard Miller). Their arguments are quite straightforward: the absence of market power precludes profit-maximizing behavior based on predatory pricing, mutual forbearance, advertising advantages, etc.; and if one assumes a pure conglomerate, among whose subsidiaries' products there are no substitution or complementarity relations,' then the necessary condition for maximizing overall conglomerate profits is to maximize each subsidiary's profits by setting its output to the level at which marginal cost equals price -exactly what each subsidiary would have done if it were an independent purely competitive profit-maximizing firm. Thus, if one assumes that the firm maximizes total profits, conglomeration per se will be behaviorally neutral in the absence of monopoly power. Although the above argument is correct within the restrictions of its assumptions, our basic question is still not satisfactorily answered. Pure profit maximization is a very restrictive assumption, effectively implying-among other things-that the firm either operates in an environment in which there is no uncertainty, or that its management is indifferent to risk.2 Such an assumption seems especially restrictive and inappropriate for modeling the behavior of conglomerate firms, since these firms have claimed risk reduction to be a major goal of their merger activity (see Harold Geneen). The model developed below compares the optimal output of a risk-averse single product firm subject to demand uncertainty to that of a pure conglomerate subsidiary operating in the same market, assuming that the single product firm and conglomerate subsidiary are identically situated within that market3 (which I shall call the ith product market) and that their managements are equally risk averse. The results indicate that, except in very special circumstances, conglomeration will not be behaviorally neutral even if all subsidiaries possess no monopoly power at all.

The standard model of monopolistic imperfect quality discrimination involving consumer self-selection has shown that no distortion occurs at the highest quality level, while all lower quality levels are degraded in order to maintain profitable market segmentation. This result flows from the assumption that consumers with a higher total utility of quality also have a higher marginal utility of quality. The paper develops a reasonable model in which the standard assumption is not satisfied, and this alternative model yields vastly different conclusions regarding the form of quality distortion. In particular, quality may be enhanced, not degraded, to maintain profitable market segmentation. Copyright 1989 by American Economic Association.

If labor is able to capture a portion of the economic rents in profitable industries, industry profitability and the relation between market structure and profitability may both be mismeasured. This paper estimates a simultaneous equation system in which both the price-cost margin and compensation per worker (including fringe benefits) are endogenous variables. The authors' sample consists of eighty-five well-defined producer goods industries. They find that labor compensation does include some capture of economic rents. Further, when they correct for this rent capture, the relation between market concentration and the price-cost margin is strengthened significantly. Copyright 1991 by MIT Press.

A number of studies have found a positive relation between market share and profitability. Michael Porter argues that this need not hold when small firms find strategic niches protected by mobility barriers. This paper examines that hypothesis by comparing the profitability of large and small lines of business when the activities of the two groups (proxied by the allocation of sales across submarkets) differ on average. We find that in heterogeneous product mix industries profits of large LBs are no longer significantly greater than profits of smaller rivals, except that market leaders maintain their advantage regardless of product mix.

Ralph M. Bradburd, Richard E. Caves, Transaction-Cost Influences on the Adjustment of Industries' Prices and Outputs, The Review of Economics and Statistics, Vol. 69, No. 4 (Nov., 1987), pp. 575-583

JN the thirty years since Joe Bain's seminal I study (1951), many economists have attempted to determine whether or not there exists a critical level of market concentration at which a discontinuity occurs in the relation between industry concentration and profitability. In this paper we develop and test a more general model, based on organizational costs, which posits the existence of two critical levels of market concentration: one at which an existing cooperative equilibrium will break down as concentration declines, and one at which a cooperative equilibrium will become attainable as concentration increases. We show that the standard model of the critical level of concentration can be regarded as a special case of our more general model, and also that the more general model attains a statistically superior fit. In section II we briefly review some of the previous literature in this area. We develop our model in section III and specify and estimate it in sections IV and V. In sections VI and VII we summarize and interpret our results and present some policy implications of our findings.

EVERYBODY talks about the relation of industries' profit rates to their markets' rates of growth, but nobody does anything about it. Specifically, researchers have confirmed the effect of the growth of nominal output on profits in many multivariate studies, without specifying closely the hypothesis under test or the measure of demand growth appropriate to test it. A profits-growth relationship could stem from several mechanisms-the lagged adaptation of capacity to unexpected changes in demand, reactions of oligopolists to disturbances in their consensus, etc. These mechanisms-how and where they work-hold their own normative interest. Therefore, knowing what behavior (and what structure, lying behind it) accounts for the profits-growth relationship should do more than improve the specifications of our studies of allocative efficiency. It should also expand our knowledge of adaptive processes that are important and hard to observe directly. In this paper we shall synthesize the available explanations of why changes in market demand should affect an industry's profits, then present a statistical test of the relative significance of the competing explanations.