Business Cycles and the Relationship between Concentration and Price-Cost Margins

Abstract

Using a newly constructed panel data base, we examine changes in price-cost margins in 284 manufacturing industries between 1958 and 1981. A key finding is a dramatic narrowing of the spread between the margins of concentrated and unconcentrated industries over this period. We provide evidence that this narrowing is a result of the greater sensitivity of price-cost margins in more concentrated industries to demand fluctuations. This finding is robust to the inclusion of other industry variables and to measures of import competition. The results indicate that cross sectional estimates of the concentration-margins relationship are likely to be both biased and misleading.