The profitability‐concentration relationship in New Zealand manufacturing industry

Abstract

This study tests two competing hypotheses concerning the link between market concentration and profitability: the structuralist view that concentration facilitates the exercise of market power, and the Demsetz‐led counter‐argument that concentration and profitability stem jointly from the superior efficiency of large firms. The test is based on the application of OLS multiple regression analysis to census data (some unpublished and no longer obtainable) for a cross‐section of 92 New Zealand manufacturing industries for 1978–1979. Separate regressions are run on three different groupings of firms (the number one firms, the second‐ranked firms, and the rest), these groupings being chosen to represent “strategic groups”. Overall, the results suggest that both explanations contributed to the profitability‐concentration relationship in New Zealand in the late 1970s. Subsequent deregulation of the economy and import liberalisation may have since modified the relationship, however.

Notes

School of Applied and International Economics, Massey University.