Recent empirical studies on the structure performance model have failed to find a statistically significant positive correlation between four-firm concentration ratio index or Hirschman Herfindahl index and industry profitability. Moreover, the studies find individual firm market shares to be superior to both the measures of market structure. A few studies suggest that an increase in the inequality in the market share of firms would lead to a higher level of profit for the leading firms and also for the industry. The approach in most of the previous studies has been to use statistical tests of nested hypotheses to make a choice among market share, the inequality in market share, the four-firm concentration ratio index or Hirschman Herfindahl index. Furthermore, most of the studies are based on industry data from developed countries. The main objective of this article is to answer the question: Does the choice of market structure measure matter to explain the variation in profitability of the Indian car industry? The authors have used the Davidson-MacKinnon's J test to examine the non-nested hypotheses and found that the inequality in market share, measured in terms of coefficient of variation of the same, is a superior measure of market structure. In addition, the coefficient of four-firm concentration ratio index is significantly negative, which depicts the absence of collusive behavior among firms.
In the classical tradition, following Bain (1951, 1956), it was propounded that increase in the
market concentration, measured by the Four-firm Concentration Ratio Index (CR4) and/or
Hirschman Herfindahl Index (HHI), tends to raise the industry profit by assuming that it
facilitates collusion. In general, industry profit was assumed to be primarily determined by
the ability of the established firms to restrict rivalry and to protect themselves by creating
barriers to entry. Most of the classical studies included CR4 and/or HHI as independent
variables in the regression analysis of industry profitability and reported the coefficient of the
same to be positive and statistically significant.
An anti-classical, revisionist view of industrial economics has emerged in the last three
decades.2 According to this view, all markets are competitive and scale economies are either
absent or negligible. The key assumption is that, within an industry, there are persistent
efficiency differences among firms. An efficient firm will be able to increase its market share
only at the expense of its rivals and therefore, experiences higher level of profitability.
In other words, an increase in inequality of market share of firms in an industry will lead to
higher level of profits for the leading firms (and thus the higher level of average industry
profitability). The revisionists’ view implies that the Market Share (S) and/or the inequality
in market share (e.g., measured in terms of the Coefficient of Variation of the same, CV) should
appear as the main determinant of the profitability in the regression analysis. |
