Testing for Persistence of Profits’ Differences Across Firms

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Abstract
We review the logic and implications underlying both static and dynamic models of competition, and associated tests of competitive effectiveness. Complications arising due to innovation, mergers and cyclical factors are discussed. Points raised in the theoretical discussion are illustrated with case histories and estimates for a number of US and UK companies. The empirical analysis tests a larger set of models than has been used in most previous work, and uses longer time series of company profits. We conclude that the patterns of profits observed in both countries are consistent with a larger and more complicated set of models of the competitive process than has been assumed until now, and that further work remains to be done in clarifying both why some firms are persistently profitable, and the nature of the ‘shocks’ that appear to produce structural breaks in the time series of companies’ profits.